Fed minutes drove hopes of peak hawkishness: Nasdaq 100, China A50, US dollar

Market Recap

Despite some mid-day jitters, major US indices managed to close higher for the day after the release of the Federal Reserve (Fed) minutes seemingly confirmed market expectations that peak hawkishness has been reached, with the path of rate hikes firmly leaning towards 50 basis-point (bp) moves next. The content of the Fed minutes may not have provided too much of a surprise, with the slower pace of rate hikes having been guided previously. However, the decision being the wide consensus among policymakers became the source of market comfort. There were also louder concerns on economic conditions, with the possibility of a recession sometime next year being brought up at an almost 50% chance, which was not present in previous minutes. Projection for economic activities for the November Federal Open Market Committee (FOMC) meeting was also stated to be weaker than the September forecast. With that, the downside risks to growth left interest rate expectations firmly anchored at a terminal rate of the 5-5.25% range for now, with US dollar heading lower in line with further moderation in US Treasury yields. That provided a positive backdrop for the risk environment as we head into the Thanksgiving holiday ahead.

The Nasdaq 100 has managed to defend its key resistance-turned-support level at 11,600 overnight, which marked the neckline of a near-term double-bottom pattern. With Fed officials’ views met with clarity for now, along with some room to go before the next FOMC meeting on 13-14 December, the index may attempt to retest the 12,200 level next. This is where a longer-term downward trendline resistance seems to be in place, as the upward-sloping moving average convergence/divergence (MACD) continues to suggest building momentum to the upside.

Asia Open

Asian stocks look set for a positive open, with Nikkei +1.30%, ASX +0.40% and KOSPI +0.80% at the time of writing. Japan markets are back from their holiday, with positive catch-up performance translating into some outperformance in today’s opening. With the release of the Fed minutes being the key risk factor yesterday, market sentiments in the region may continue to find comfort that the minutes have done little in driving more hawkish interest rate expectations. Coming after recent weakness, Chinese equities are also seeking to regain a positive footing overnight, with the Nasdaq Golden Dragon China Index closing 2.3% higher. Despite Covid-19 cases nearing its previous record peak, downside market reaction has been more muted this time round, with Chinese indices falling by around 3.5% versus the 13% decline in March this year, where the first sharp wave of virus spreads occurred. Current resilience may suggest much of the risks having been priced for now, as economic restrictions are pitted against hopes of eventual reopening. A peak in virus cases may be one to watch, which may be headlines to lift risk sentiments ahead. The economic calendar today will leave the Bank of Korea’s interest rate decision in focus, where a downshifting in rate hike to 25 bp is the consensus.

For the China A50 index, the 12,600 level will be a key resistance level to watch ahead, where a confluence of key Fibonacci levels lies in coincidence with a downward trendline resistance. The index has failed to sustain above the level on previous two occasions since October this year. For now, the near-term upward bias is displayed in the formation of higher highs and higher lows, with any break above the 12,600 level potentially paving the way for the 13,500 level next.

On the watchlist: Recent upmove for US dollar index seemingly short-lived

A recent attempt for the US dollar index to recover seemingly came short-lived, as losses this week have effectively offset past week’s overall gains. Expectations are leaning firmly towards a 50 bp hike in December, with the peak-hawkishness narrative further unwinding the huge bullish positioning in US dollar since the start of the year. On the technical front, recent downside seems to be rejecting the formation of a bullish crossover on MACD, with sellers seeking to challenge a daily bullish hammer candlestick formed last week. This will leave the 105.00 level on watch next, which marked a previous key dip-buying level for the US dollar, in line with a 38.2% Fibonacci retracement. A break below this level could seem to pave the way towards the 102.00 level next.

Wednesday: DJIA +0.28%; S&P 500 +0.59%; Nasdaq +0.99%, DAX +0.04%, FTSE +0.17%