Downside reaction to US GDP data challenged recent gains: VIX, Nikkei 225, Gold

Market Recap

While the year-end period generally does not present much volatility in the equity markets, that does not seem to be the case last night. The final read for US quarter three (Q3) gross domestic product (GDP) has seen a significant upward revision (3.2% versus 2.9% forecast), which triggered a downside reaction in major US indices, potentially with the sell-off exacerbated by the low-volume trading environment. Equity bulls found discomfort with the surprise advance in personal consumption (2.3% versus 1.7%), which reflected stronger household spending and undermined Federal Reserve (Fed)’s aim of dampening demand to curb rising prices. Elsewhere, the core personal consumption expenditures (PCE) prices for Q3 was revised higher to 4.7% as well (versus previous 4.6%). While some may argue that the data is backward looking and the resilient numbers reduce the risk of a ‘hard landing’, the confluence of stronger demand and more persistent prices also suggest that more work needs to be done from the Fed. That has been the market focus overnight, with US Treasury yields and the US dollar heading higher while rate-sensitive Nasdaq underperformed.

Ahead, the November core PCE price index will be on watch later today to calm markets’ nerves. Having been accustomed to seeing downside surprise in inflation over the past two months, further moderation in inflation will be what market bulls hope to see. Current expectations are for a 4.7% year-on-year (YoY) growth in November, down from the previous 5%. Overnight, the sharp pulling back of the VIX mid-day may still keep hopes of a Santa rally alive before the January earnings season pose a key hurdle for risk sentiments.

The VIX continues to consolidate above a key support level for now, with intermittent attempts to break higher met with the lack of catalysts to provide any follow-through for now. Further consolidation could be on the table as we head into the quieter festive week, but with one to watch for any break above the 24.75 level when volume returns.

Asia Open

Asian stocks look set for a negative open, with Nikkei -1.45%, ASX -1.15% and KOSPI -1.78% at the time of writing, tracking the negative handover from Wall Street. The US dollar has thus far seen some attempts from dip-buyers to hold up above a resistance-turned-support at the 103.50 level but much is still up in the air as gains have been relatively short-lived. Any breakdown of the 103.50 level may be in focus, which could drive a new lower low and reiterate its ongoing downward bias. A lower US dollar would be welcomed by risk assets.

The economic calendar today saw the release of Japan’s core inflation rate at 3.7%, which is in line with expectations. After stripping away food and energy prices, inflation rate is at 2.8% versus previous 2.5%, which suggests that pricing pressures are more broad-based now. This will likely support the recent Bank of Japan (BoJ)’s shocking move to expand the band around its 10-year government bond yield target. The Nikkei 225 index continues to reel from the BoJ’s decision, with the higher 10-year risk-free rate delivering a higher watermark for equities to perform. While the index has retraced more than 7% over the past week, it is attempting to stabilise at the 26,000 level, where a key 23.6% Fibonacci retracement level stands. The relative strength index (RSI) in oversold conditions is also supportive of some near-term relief, but any rebound could likely be short-lived as corporate earnings face downward pressure alongside a higher risk-free yield environment.

On the watchlist: Gold prices attempting to defend rising wedge pattern

Some renewed strength in the US dollar on the back of the risk-off environment overnight has prompted a sell-off for gold, which are attempting to defend its lower wedge trendline support. Thus far, attempts to move past the key US$1,800 level has been short-lived, with the lower highs on moving average convergence/divergence (MACD) pointing to dwindling upward momentum. The US core PCE price index release will be on watch today, with gold bulls seeking for a lower-than-expected reading to calm markets’ nerves on Fed’s tightening process. Any failure to move back above the US$1,800 level over the coming days could drive a drift lower to the US$1,751 level next, with the US core PCE index potentially presenting the last key economic data of note as we head into the upcoming quiet festive week.

Thursday: DJIA -1.05%; S&P 500 -1.45%; Nasdaq -2.18%, DAX -1.30%, FTSE -0.37%