Initial gains pared back, cautious mood remains: Nasdaq 100, USD/KRW, GBP/EUR

Market Recap

Initial gains in major US indices were pared back into the latter half of the trading session, triggered by developments in the UK in which the Bank of England (BoE) Governor Andrew Bailey stuck to its timeline of 14 October for its emergency bond purchases. This gave UK pensions funds and financial firms a three-day deadline in their scramble for liquidity, which could translate to some selling pressure in UK glints and that is likely to last over the coming days as the deadline looms. The sell-off was mirrored in US Treasuries as well, with the sudden late-night jump in US yields driving the aggressive paring back of gains for US equities. The preferences for more safety could be presented in the sharp recovery for the US dollar, along with sector performance for the S&P 500 showing a lean towards defensive sectors. On the other hand, the rout in the semiconductor space continues to weigh on the Nasdaq (-1.1%), with the PHLX Semiconductor Index clocking another day of losses (-2.5%), although the degree of sell-off lessened from previous days.

Other than that, a cut to global growth forecast from the International Monetary Fund (IMF) provided little reason to cheer, with its 2023 growth forecast reduced to 2.7% from previous 2.9%. Its warning that ‘the worst is yet to come’ suggests that the downside risks to growth remains, which points to the possibility of further downward revisions heading into next year. Markets did attempt to shrug it off, placing their focus on the upcoming inflation figures which will directly drive Federal Reserve (Fed)’s policies outlook. Ahead of the Federal Open Market Committee (FOMC) minutes release later today, further comments from Fed voting member, Loretta Mester, revealed no slightest sign of any shift in the Fed’s tightening stance. She mentioned that the central bank has yet to get surging inflation under control, despite the large amount of rate hikes this year. This has been the consensus from the various Fed officials, with the stance likely to be reiterated in the upcoming minutes once more and proving to be another test for risk sentiments.

Weakness in growth sectors on building rate hike expectations and regulatory risks (semiconductor) has brought the Nasdaq 100 index to retest a level of support, which marks a confluence of key Fibonacci retracement levels. Equity bulls may continue to attempt a bounce from here to validate a weekly bullish divergence pattern on its moving average convergence divergence (MACD) and relative strength index (RSI) indicators. That said, the formation of a lower high at the 12,200 level will be on watch, considering that the overall trend remains downward bias with a bearish crossover on its 50-day and 100-day period based on the weekly chart.

Asia Open

Asian stocks look set for a muted open, with Nikkei +0.11%, ASX +0.25% and KOSPI -0.16% at the time of writing. The reversal of gains in Wall Street overnight may trigger a more cautious mood around the Asia region today, with some wait-and-see as the FOMC minutes release and US inflation data loom. Economic data out of Japan paints a more challenging backdrop for its manufacturing sector, with business confidence among its big manufacturers falling for a second straight month to its five-month low. Machinery orders underperformed as well (-5.8% month-on-month versus -2.3% expected), which suggests a more restrained corporate-spending environment as global economic conditions, persistent import costs and a weak yen weigh. This could go against the recovery in its services sector, supported currently with pent-up demand and support for its tourism industry.

Perhaps more on the positive side is the faster-than-expected loan growth in China for September, coming in at 11.2% year-on-year (YoY) versus the 10.9% forecast. This is likely uplifted by a further push forward with infrastructure investments from local governments, with the trend expected to continue towards the rest of the year in a bid to support the economy. Overall growth could still point to a more gradual and tepid recovery, especially with recent tone suggesting that Chinese authorities will stick to its zero-Covid-19 policy in the lead-up to the National Congress this week.

Interest rate decision from the Bank of Korea saw a largely-expected 50 basis-point (bp) hike in a bid to contain imported inflation from a surging US dollar. The USD/KRW remains supported by its 50-period moving average (MA) on its four-hour chart with its overall upward trend in place, considering that the central bank is largely playing catch-up to the US Fed. A move below the 1,400 level could be warranted to suggest a shift in sentiments to the downside, considering that it will put in place a lower low. Until then, the overall upward bias for USD/KRW could remain in place.

On the watchlist: GBP/EUR continues to give back recent gains

The firm stick to the end of its emergency bond purchases this week for the UK BoE has revived market jitters on the uncertainty of what will happen after the support measures end. While there is a strong possibility that the central bank could step in again if the sell-off in its bond market failed to be contained, further move will seem to put its inflation fight in jeopardy. The pound did not react well to the lingering uncertainty, with the GBP/EUR overturning all of this week’s gains. The break below the 1.185 support level points to a near-term downward bias for now, with the level marking a key 50% Fibonacci retracement, along with its 100-period MA on its four-hour chart. Trading within the current downward channel could lead to a drift lower for the pair towards the rest of this week, and it seems like a break back above its recent high at the 1.155 level could be warranted in order to denote renewed market confidence.

Tuesday: DJIA +0.12%; S&P 500 -0.65%; Nasdaq -1.10%, DAX -0.43%, FTSE -1.06%