Further de-risking ahead of Fed Chair’s comments: VIX, Hang Seng Index, AUD/USD

Market Recap

Major US indices failed to follow through with the positive moves surrounding Chinese equities yesterday, with the underperformance in growth sectors pointing to some lingering caution ahead of upcoming comments from Federal Reserve (Fed) Chair Jerome Powell. Economic data overnight showed US consumer confidence falling to its four-month low, but consumers were slightly more optimistic about the labour market while 12-month inflation expectations increased to their highest level (7.2%) since July. Hence, it seems to provide a mixed view overall. On the other hand, housing prices data reflected a lower-than-expected growth but the double-digit (10.4%) year-on-year (YoY) growth suggests the need for further moderation ahead.

While there were initial reactions to these data, the impact on market moves were not sustaining as the focus remains on greater drivers of rate expectations from Jerome Powell’s comments and US Personal Consumption Expenditures (PCE) price index up ahead. Recent days have been met with hawkish comments from Fed members, with some concerns that the Fed Chair may join the list as well. He has attempted to shift market focus away from slower rate hikes to the terminal Fed rate at the last Federal Open Market Committee (FOMC) meeting, so the tendency for him to push back against recent market optimism on slower hikes could spur some wait-and-see.

The Volatility Index (VIX) has seen some uptick in recent days after coming in close to its 22.64 level, which has not been broken below since January this year. The flat-lined moving average convergence divergence (MACD) points to some ebbing momentum to the downside for now, with the recent risk rally taking a pause while in search of new catalysts to provide greater direction. This comes as the S&P 500 has rallied 15% since mid-October, with the uptick in VIX suggesting some renewed hedging ahead of further Fed speeches.

Asia Open

Asian stocks look set for a muted open, with Nikkei -0.48%, ASX +0.07% and KOSPI +0.04% at the time of writing. Chinese equities have presented a divergence from their US counterparts yesterday, with the Nasdaq Golden Dragon China Index closing 5% higher. Reopening hopes for China remain the key catalyst, with authorities vowing to increase vaccination among the elderly, which were perceived as another baby step towards an eventual reopening next year. The lifting of ban on equity refinancing for listed firms also provided a lifeline for its property sector, bringing some optimism that the worst is over for the sector.

The economic calendar today will leave China’s National Bureau of Statistics (NBS) Purchasing Managers' Index (PMI) figures in focus, with the manufacturing sector expected to remain in contractionary territory at 49.0, roughly in line with previous 49.2. With Covid-19 cases surging to its record high, disruption in manufacturing activities and constricted consumer spending may still present a muted growth picture. That said, with sentiments tapping on hopes of reopening, weaker growth readings could see some shrugging off, with an underperformance in readings potentially looked upon as reinforcing an earlier reopening timeline. For the Hang Seng Index, the 18,600 level will be one to watch, which marked its recent high in mid-November. A move above this level may support further upward bias by pointing to the formation of a new higher high and a break above a key Fibonacci confluence zone.

On the watchlist: AUD/USD finding resistance at Fibonacci confluence zone

After surging close to 9% since mid-October this year, the AUD/USD has stalled recently at the 0.676 level of resistance, which marked a Fibonacci confluence zone in coincidence with a downward trendline resistance. Improved sentiments in China and higher iron ore prices were set against recent US dollar strength, with the lower highs on MACD suggesting some ebbing momentum to the upside for now. The near-term consolidating moves point to some lingering indecision. The 0.676 level may be key to watch, with the pair having to overcome this level in order to pave the way towards the 0.691 level next.

Tuesday: DJIA +0.01%; S&P 500 -0.16%; Nasdaq -0.59%, DAX -0.19%, FTSE +0.51%