Optimism brewing from US mid-term elections: Russell 2000, Japan 225, Gold

Market Recap

Major US indices gained for the third consecutive day, as the US dollar index continued to lose ground on optimism surrounding the potential gridlock in US mid-term elections, with the largely quiet economic calendar leaving it as the key focus for now. The rout in the cryptocurrencies space may be limiting for gains but nevertheless, the Dow Jones Industrial Average (DJIA) has overcome its downward trendline resistance at the 32,900 level, while the S&P 500 has also managed to stay above its 3,800 level. The in-tandem surge in Volatility Index (VIX) alongside the S&P 500 could also warrant some attention by denoting greater hedging activities in place, as market participants also have their eyes on the upcoming US Consumer Price Index (CPI) release to provide the go-ahead for the rally. Any higher-than-expected read on that front could still run the risk of cutting the rally short. With inflation persistence driving market jitters previously, current expectations are pointing to a moderation in core inflation to 0.5% month-on-month (MoM) from previous 0.6%.

The US two-year yields have been largely in consolidation over the past few days, and although there has been a bearish shooting star formation, a move below the 4.60% level may be needed to provide some much-needed confirmation. Likewise, for the US 10-year yields, despite a pullback yesterday, it hovers around an upward trendline support. Earnings season are largely behind us, but Disney’s results remain in focus. Higher-than-expected subscriber gains failed to provide much conviction for market participants, as higher streaming costs drove an underperformance in earnings, along with a warning that streaming growth could taper moving forward. High market expectations for its parks, experiences and products segment also dampened the segment’s record performance.

The Russell 2000 index is attempting to pare back on its previous post-Federal Open Market Committee (FOMC) losses, keeping its near-term ascending channel pattern intact with the bulls rejecting the formation of a bearish crossover on moving average convergence/divergence (MACD) for now. The 1,840 level remains a key resistance to overcome however, with the level marking a key 23.6% Fibonacci retracement in coincidence with its 200-day moving average (MA). With the looming upside risks to inflation, any breakdown of the channel pattern below the 1,770 level could leave its October bottom on watch next.

Asia Open

Asian stocks look set for a slight positive open, with Nikkei +0.10%, ASX +0.70% and KOSPI +0.51% at the time of writing. The improved risk environment has brought the Nikkei 225 index to its seven-week high after a breakout of an ascending triangle pattern but is stalling around the 28,000 level in today’s session. Post-Covid recovery continues to drive some resilience in its services sector, but the manufacturing sector remains weighed by downward pressure on global outlook and the weak yen, providing a mixed view overall. For now, the index managed to retain its upward bias by forming a new higher high. Near-term resistance could be at the 28,400 level, with further upside to be more dependent on further Wall Street gains. The USD/JPY (大口） has headed below the 145.90 level, which marks a previous level of intervention by Japanese authorities. Near-term downward bias seems to be in place with the lower highs presented.

The day ahead will leave China’s inflation data in focus. With intermittent Covid-19 restrictions hindering consumer spending and the previous spike in food prices fading off, consumer prices are expected to trend lower to 2.4% from previous 2.8%. Once again, the data could reflect the lacklustre demand conditions in China and suggest that more supportive policies can potentially be in place, although an economic reopening will still be the highest-conviction catalyst looked upon by markets. Producer prices are expected to mark a 1.4% decline from a year ago, the first contraction since December 2020. While sentiments have managed to shrug off weak trade data this week, climbing virus cases in China could renew concerns of restriction measures, potentially seeing some near-term unwinding of reopening optimism.

On the watchlist: US dollar weakness propelled gold prices above descending channel pattern

The continued weakness in the US dollar has propelled gold prices above a longer-term descending channel pattern, after managing to overcome the channel resistance at the US$1,680 level. This also comes amid a pullback in US real yield, although it could still be too early to say whether it will be a sustained move, considering that terminal rate expectations from the Federal Reserve (Fed) remains well-anchored. While the technicals point to improved sentiments around the yellow metal, all eyes will be on the upcoming US CPI data, where buyers will be seeking validation from a weaker-than-expected inflation print to fuel further upside. Near-term resistance lies at its October high at the US$1,730 level, with any move above this level potentially paving the way to retest the US$1,800 level next.

Tuesday: DJIA -0.39%; S&P 500 -0.75%; Nasdaq -1.03%, DAX +0.08%, FTSE +0.66%