Fourth straight day of losses for US indices: Natural gas, USD/JPY, GBP/EUR

Market Recap

The US equity markets kickstarted the new trading week with their fourth straight day of losses (DJIA -0.49%; S&P 500 -0.90%; Nasdaq -1.49%), following the aggressive de-risking process in the aftermath of the recent Federal Reserve (Fed) meeting. Two months of downside surprise in the US inflation readings and signs of a weaker economy are insufficient to sway the Fed’s hawkish views for now, which brought about some unwinding of previous dovish-pivot bets. With the sell-off, market breadth for the S&P 500 has moderated to more neutral levels from previous overbought conditions, while the lean towards defensive sectors continue to reveal some caution in the risk environment. Sentiments may attempt to recover over the coming days as the VIX failed to see much of a significant pick-up in tandem with equities’ weakness overnight, but the overall downward bias could seem to remain.

The lower-than-expected print for NAHB/Wells Fargo Housing Market Index (31 versus 34 forecast) provided the only economic data on the calendar to digest, with the US housing market showing a quicker moderation in response to higher interest rates and lower consumer affordability. Market initial reaction to economic weakness was to the upside on the dovish-pivot story, but gains were proven to be short-lived without the go-ahead from the Fed. US Treasury yields were higher across the board, driving the underperformance in the rate-sensitive Nasdaq. The US dollar index was higher as well, but remained below the key 105.00 level.

On another front, the European Union (EU) has reached an agreed gas price cap of 180 euros per megawatt hour to cushion the impact of its energy crisis, which is higher than the current price of around 109 euros per megawatt hour. The overall effectiveness remains to be seen, but nevertheless, the move aid to remove a key overhang over its previous deadlock situation. US natural gas futures have previously rallied off their December low at the US$5.320 level, but gains were short-lived as prices seem to be heading back towards the key US$5.320 support once more. A break below the level could potentially pave the way towards the US$4.740 level next.

Asia Open

Asian stocks look set for another downbeat open, with Nikkei +0.21%, ASX -0.74% and KOSPI -0.66% at the time of writing, largely tracking the negative handover from Wall Street overnight. The Nasdaq Golden Dragon China Index closed lower (-0.62%) as well, as reopening optimism is seeing a face-off with virus surges. The Hang Seng Index continues to hang just below its 200-day moving average (MA), but the largely muted moves upon retest of the key MA resistance still suggest some resilience from buyers.

The day ahead will leave the Bank of Japan (BoJ) meeting in focus. While the central bank’s easing stance is expected to remain unchanged at the upcoming meeting once more, any shift in tone to lay the groundwork for an eventual rise in interest rates will be heavily scrutinised. For the USD/JPY (大口）, narrower yield differentials on falling US Treasury yields have triggered an 11% retracement from its October 2022 peak, which brought the pair to retest a confluence of its 200-day MA and key 38.2% Fibonacci retracement level. Any downward break of the key 200-day MA support may leave the 132.00 level on watch next.

On the watchlist: GBP/EUR remains under pressure from policy outlook divergence

The aftermath of the Bank of England (BoE) and European Central Bank (ECB) meetings was met with a tale of divergence whereby despite similar 50 basis-point (bp) hikes, the ECB’s forward guidance was seen to be far more hawkish. The vote split among BoE policymakers support further downshift to 25 bp moves early next year, while on the contrary, the ECB displayed a tougher policy stance as inflation forecasts are revised higher, quantitative tightening is guided to start from March 2023 and interest rates are guided to stay higher for longer. The policy divergence translates to the GBP/EUR paring back all of its previous month’s gains, with yesterday’s attempt to recover finding downward pressure with a bearish pin bar formation as the moving average convergence/divergence (MACD) heads below zero. Further downside may leave the 1.156 level on watch as a key Fibonacci support, which marks its October and November lows.

Monday: DJIA -0.49%; S&P 500 -0.90%; Nasdaq -1.49%, DAX +0.36%, FTSE +0.40%