Improved risk environment to start the week: GBP/USD, Straits Times Index, NZD/JPY

Market Recap

Positive developments in the UK with the shredding of the Prime Minister’s economic policy by the new chancellor have brought a positive knock-on impact on the broader risk environment. The GBP saw some strength, while UK government bond yields retraced – both as signs of some improved market confidence with greater clarity presented in the UK government’s funding gridlock. The UK 2-year glint yield is at its three-week low at 3.54%, as rate hike bets for the Bank of England’s (BoE) November meeting have also been pared back (52% probability of a 100 basis-point hike being priced now).

An earnings beat from Bank of America’s third-quarter results also added on to the risk-on mood. Better-than-expected fixed-income trading and higher net interest income from rising rates delivered a beat on both its top and bottom line, even after factoring in a $898 million provision for credit losses. Its share price is up more than 6% overnight. This could suggest that earnings expectations heading into the season have been relatively low, coming after the heavy drawdown in valuation since the start of the year, and that may provide a lower hurdle for outperformance. Earnings from Goldman Sachs, Netflix and Tesla will be up ahead this week. Roblox shares may also warrant some attention, popping close to 20% on its September metrics report. Its number of daily users, number of hours engaged and bookings all fell from August, but markets may be finding comfort in the lower-than-expected decline – lower hurdle of outperformance with the huge drawdown?

With some optimism riding on developments in the UK, the GBP/USD will remain on watch. The pair is currently back to retest the key 1.142 level, where the gridlock in UK government funding has previously driven a 4.8% retracement from that level. Therefore, any push above the 1.142 level will be on watch for a more concrete sign of ebbing market jitters. This will also drive the formation of a new higher high and reinforces the overall near-term upward bias.

Source: IG Charts

Asia Open

Asian stocks look set for a positive open, with Nikkei +1.49%, ASX +1.40% and KOSPI +1.01% at the time of writing. Thus far, China’s Party Congress has brought on little surprise, with Chinese equities delivering a more lukewarm reaction yesterday. Amid the ongoing Party Congress, China has delayed the release of several economic data this week, including its third-quarter gross domestic product (GDP) data due today. But nevertheless, the improved risk environment could provide a positive backdrop for the Asia region as well, with further gains seen in US equity futures this morning. This could seem to reignite some short-covering, especially coming after the extreme bearish positioning into the recent US CPI data release.

The Straits Times Index will be on watch, having briefly fallen below the key psychological 3,000 level in yesterday’s session but has managed to hold up at the close. Further recovery could be on the cards in the near term on global risk-on sentiments, along with a reversion to more neutral technical conditions from oversold levels. That said, longer-term upside remains a question for now, considering that fund flows from institutional investors pointed to an overall heavy net outflow of S$467 million over the past month. Near-term, the 3,000 level will remain as a crucial support level to hold.

Source: IG Charts

On the watchlist: Risk-on mood led to confirmation of double bottom for NZD/JPY

The improved risk environment has driven a recovery in the risk-sensitive NZD/JPY, which led to the confirmation of a double bottom pattern after breaking above the neckline yesterday. Pushing above previous bearish pin bars, along with the higher highs on MACD, seems to reveal the presence of strong buyers. The release of New Zealand’s 3Q inflation rate this morning revealed a higher-than-expected reading at 7.2%, way towering above the 6.6% forecast. This seems to translate to upward pressure on its terminal rate and reinforces the ongoing policy divergence story. Ahead, the 86.30 level may potentially be on watch as a line of resistance to overcome, which the level has weighed on the pair on at least six previous occasions since March this year.

Source: IG Charts

Monday: DJIA +1.86%; S&P 500 +2.65%; Nasdaq +3.43%, DAX +1.70%, FTSE +0.90%