Post-Fed sentiments see major US indices heading lower: Dow Jones Industrial Average, Nikkei 225, AUD/JPY

Market Recap

The post-Federal Reserve (Fed) market sentiments continue to see major US indices drifting lower last Friday (DJIA -1.62%; S&P 500 -1.72%; Nasdaq -1.80%), with the Dow Jones Industrial Average (DJIA) closing at a new 2022 low. While some dip-buying at the last hour was accompanied by a retest of their June 2022 low, the overall downward trend suggests that caution may remain and failure for a decisive bounce from this highly-watched level over the coming days could increase the chances of an eventual downward break. Risk assets continue to take its cue from further strength in the US dollar (+1.52%), while US short-term rates ticked higher as well, providing little catalysts to cheer. The inversion of the yield curve at a new low since 1981 reflects increased risks of recession, which may bode the question of whether economically-sensitive sectors could bear the brunt of the next leg of sell-off if economic conditions were to reveal further signs of weakness over the coming months.

Year-to-date, the DJIA is down 19.1%, while the Nasdaq is down 31.5%. For the former, a break below its 30,000 psychological level will leave the level as a resistance to overcome. Equity bulls may attempt to defend a close in bear market territory over the coming days, but looming recession risks may point to such move as being a temporary reprieve.

The economic calendar last Friday brought about higher-than-expected flash Purchasing Managers' Index (PMI) readings out of US, with the services sector showing a slight contraction, which was better than expected (49.2 versus 45 forecast). That said, a knee-jerk upside reaction to the data was quickly overturned, which suggests that signs of economic resilience are currently overlooked in light of further policy tightening underway. Fed Chair Jerome Powell’s comments on Friday provided little fresh clues on rates and economic outlook, but ‘more pain’ to curb inflation remains the takeaway from the Fed meeting. The upcoming week will bring focus to a slew of comments from Fed officials once more, with one to watch for any resilience in market moves to these comments as a sign that the sell-off is attempting to stabilise. The key highlight may be the release of US personal consumption expenditures (PCE) price index to end the week, with the core aspect expected to show a further uptick to 4.7% from previous 4.6%, pointing to the persistence in pricing pressures.

Asia Open

Asian stocks look set for a negative open, with Nikkei -2.05%, ASX -1.67% and KOSPI -1.71% at the time of writing. Momentum may follow from further sell-off in Wall Street to end last week, with strength in the US dollar weighing on Asian indices on what tends to be an inverse relationship historically. The release of Japan’s composite flash PMI reading this morning saw overall economic activities hanging on to expansionary territory (50.9) with the heavy-lifting coming from its services sector (51.9 versus previous 49.5), likely reflecting the positive impact from reopening. That said, factory activities’ growth continues to come under pressure (51 versus previous 51.5), suggesting an ongoing moderation in global activities, which kept risk sentiments in check. This marks the slowest expansion since January 2021, with output and new orders contracting for the third consecutive month as firms face higher prices from a weaker yen and slowing global demand.

The Nikkei 225 index continue to see some downward pressure after the data release, with a break below an upward trendline and a previous resistance-turned-support at the 26,900 level suggesting that sellers remain in control. The 26,900 level will serve as resistance to overcome, where a 38.2% Fibonacci retracement level stands. Level of support may be at the 26,000 level, where the index was supported on three previous occasions.

On the watchlist: Break below trendline support for AUD/JPY may leave 91.13 level on watch

A subdued risk environment pressuring the risk-sensitive Australian dollar and Japan Ministry of Finance’s surprise intervention for the Japanese yen have both translated into a break of the AUD/JPY below an upward trendline support. Based on the IG client sentiment, traders are less net-short compared with last week, with recent changes in sentiment suggesting that the current AUD/JPY price trend may soon reverse lower despite the fact traders remain net-short. This follows a bearish moving average convergence divergence (MACD) divergence on the weekly chart, where lower highs on MACD accompanying higher highs on the pair points to dwindling upward momentum for now. This may leave the 91.13 level on watch next, where a 38.2% Fibonacci retracement level stands as support on three previous occasions.

Friday: DJIA -1.62%; S&P 500 -1.72%; Nasdaq -1.80%, DAX -1.97%, FTSE -1.97%