Hopes of relief rally remain amid low-volume session: S&P 500, Straits Times Index, AUD/NZD

Market Recap

Amid the low-volume trading session ahead of the US holiday this week, major US indices managed to trade higher overnight, seemingly an attempt to resume its recent relief rally after a period of consolidation post-Consumer Price Index (CPI). This came as the US dollar marked its first decline since last Thursday, alongside some weakness in US Treasury yields, which helped to underpin a slight outperformance in the Nasdaq. Sentiments seem to be tapping on better-than-expected earnings out of US retailers and some slight moderation in rate hike bets ahead of the Federal Open Market Committee (FOMC) minutes release, while a 1% rise in oil prices lifted the energy sector to be the top-performing sector at a 3.2% gain.

The S&P 500 has been trading on a near-term rising channel pattern since early-October this year, with recent retracement finding support at its 100-day moving average (MA). Hopes of further upward bias are kept alive after trading within a period of consolidation post-CPI, with the 100-day MA serving as a key line of support at the 3,900 level. The index could attempt for a retest of its 200-day MA over the coming days, which will be a crucial resistance to overcome. This is considering that the index has not managed to overcome its 200-day MA since April this year. Ahead, the FOMC minutes release will be a potential key mover for market sentiments. Recent comments from Federal Reserve (Fed) officials have been leaning towards a slower pace of rate hikes, but during the last FOMC meeting, Fed Chair Jerome Powell was quick to shift market focus away from slower hikes and towards the Fed’s terminal rate instead. Any deepening signs of concerns for the economy from Fed members will be looked upon as a basis for moderating rate hikes, which could further support risk sentiments for now.

Asia Open

Asian stocks look set for a positive open, with ASX +0.86% and KOSPI +0.69% at the time of writing. The Japan market is closed today for Labour Thanksgiving Day. In China, surging Covid-19 cases to near record levels are prompting a rethink of previous economic reopening narrative, as mobility curbs are reinstated to keep cases under control. As with previous instances, a peak in virus cases will be one to look for and until that is presented, a tone of caution could linger for Chinese indices for now. The day ahead will leave the Reserve Bank of New Zealand (RBNZ) meeting in focus, along with the October release for Singapore’s inflation rate.

The growth projections from Singapore’s Ministry of Trade Industry (MTI) this morning pointed to gross domestic product (GDP) growth of around 3.5% in 2022, before moderating to 0.5%-2.5% in 2023. The lower-growth story may have been pre-empted previously by the Monetary Authority of Singapore (MAS) with its below-trend growth guidance, but recent market estimates could still seem to lean towards the higher end of recent forecast. Weakness in external demand, namely with tighter policies in US and zero-Covid stance in China, far more than offset the improvement in domestic services industry.

For the Straits Times Index, recent retest of its August peak at 3,320 was met with some selling pressure as technical conditions moderated from overbought levels. That said, the near-term upward bias remains intact for now, with potential support at the 3,230 level. This is where a downward trendline lies in coincidence with a key 50% Fibonacci retracement.

On the watchlist: AUD/NZD trading at seven-month low ahead of RBNZ meeting

Heading into the RBNZ meeting today, consensus is for the central bank to raise its official cash rate by 75 basis-point (bp) to 4.25%, which will be its largest ever single-meeting move. This may mark a shift towards a higher tightening gear after a series of consecutive 50 bp moves failed to provide much conviction that inflation is under control. Recent annual inflation at 7.2% for the third quarter is just below its three-decade high and unemployment rate is near its record low at 3.3%. This suggests that there is no letting loose in terms of further tightening stance, which could further deepen the policy divergence between the RBNZ and the Reserve Bank of Australia (RBA).

On the technical front, the 2% decline in AUD/NZD over the past week has brought the pair to trade at oversold territory on the relative strength index (RSI). While that may be supportive of some near-term relief, previous moderation from oversold levels has been short-lived, with the pair sticking to a downward trend since October this year. Any further downside could leave the 1.072 level on watch next as potential support.

Tuesday: DJIA +1.18%; S&P 500 +1.36%; Nasdaq +1.36%, DAX +0.29%, FTSE +1.03%