Major US indices pulled lower ahead of CPI data: Nasdaq 100, USD/SGD, AUD/USD

Market Recap

Major US indices slumped overnight, driven by a confluence of headwinds ranging from a better-than-expected showing from the Democrats in the US mid-term elections, further rout in the cryptocurrencies space and de-risking ahead of the key US Consumer Price Index (CPI) data release tonight. Initial expectations for the US mid-term elections were for a more than 50% chance that the Republicans will win both chambers, but current results have turned in much tighter than expected. Historical average annual returns between a split Congress and a ‘red wave’ generally did not differ too much but it seems to be the inconclusive results that removed a relief catalyst for markets to tap on. The potential deal collapse for the bailout of FTX by Binance has also triggered another wave of selling in the digital assets space, having a knock-on impact on risk sentiments. Corporate due diligence, concerns on mishandled customer funds, potential US agency investigations and risks of taking on the liquidity issues are potential areas of concerns.

Amid the risk-off mood, the key October US CPI data will be the main market driver today. Previous months’ track record of outperformance and Cleveland Federal Reserve (Fed)’s estimates seem to suggest that upside risks to inflation remain on the cards. A lower-than-expected reading, particularly on the core aspects, will be key in determining if the relief rally can find renewed strength ahead. The pullback in Treasury yields overnight seem to point to some hopes, but much is still up in the air until the readings are released.

Recent attempt for the Nasdaq 100 index to bounce off its October bottom seems to be coming to a stall. With its growth composition being highly sensitive to Fed’s policies, the US CPI data will be a make-or-break moment ahead. The 10,500 – 10,700 range will be a key area of support to hold, where a confluence of Fibonacci retracement level stands in place. Any breakdown below the 10,500 level will form a new lower low and reiterate its overall downward trend, potentially paving the way for further downside to the key psychological 10,000 level next.

Asia Open

Asian stocks look set for a downbeat open, with Nikkei -1.21%, ASX -0.35% and KOSPI -0.13% at the time of writing. The overnight slump in Wall Street has left a negative backdrop for the Asia session today, as unwinding of previous mid-term election optimism plays out, with some lingering caution in the lead-up to the upcoming US CPI release. After initial optimism around reopening, markets seem to have caught up with the continued rise in Covid-19 cases in China, which seems to serve as a reminder of the present risks in terms of restriction measures. Along with the risk-off mood, the Nasdaq Golden Dragon China Index was down close to 7% overnight. The economic calendar in the region remains quiet, but China’s lending data will be in focus. After the strong showing in overall lending last month, loan data are expected to show a smaller increase in new yuan loans. Any upside surprise may be on watch as the Chinese government continues to urge banks to support the economy, although it may do little in swaying sentiments.

With US dollar moves in the spotlight, the USD/SGD has been trading with a near-term downward bias since October this year. The breakdown of the previous double-top pattern has been completed overnight at the 1.400 level. Ahead, USD/SGD seems to be locked in a descending channel pattern, with the 1.390 level serving as lower channel trendline support. Near-term resistance points to the 1.407 level.

On the watchlist: AUD/USD on watch ahead of key US CPI data

With the dampened risk environment overnight, the risk-sensitive AUD/USD has pared almost all of its gains this week, with the pair retracing back to retest a near-term trendline support. This comes as further rise in Covid-19 cases in China has also drove some unwinding of initial reopening optimism. Much will depend on the upcoming US CPI data, with the AUD/USD having to cross the 0.654 level in order to provide conviction for a continuation of its near-term upward trend. The pair has failed to cross this level on three occasions during the past one month. A lower-than-expected reading in the October US CPI report will be what buyers are hoping for to drive further weakness in the US dollar and draw upside for the AUD/USD.

Wednesday: DJIA -1.95%; S&P 500 -2.08%; Nasdaq -2.48%, DAX -0.16%, FTSE -0.14%