Quiet start to the week with US market holiday: EUR/USD, China A50, Brent crude

Market Recap

Initial gains by major US indices following the US non-farm report release were reversed in the latter half of the trading session, as selling pressure sought to override recent dip-buying efforts. The lower-than-expected wage growth (0.3% month-on-month versus 0.4% forecast) and a surprise increase in unemployment rate (3.7% versus 3.5% forecast) on higher participation rate in the August job report may be supportive of a dovish pivot from the Federal Reserve (Fed), with expectations of a 75 basis-point (bp) hike being pared back from a week ago to a 57% probability while US Treasury yields saw a broad-based decline. That said, recent push-back of any near-term policy shift by Fed officials continue to keep expectations in check, while risk sentiments took a turn with the indefinite suspension of the Nord Stream 1 pipeline by Russia. The announcement brought a sharp turnaround in the US dollar, while driving equities to pare back on its gains mid-day.

The heightened economic risks in Europe with its heavy dependence on Russian energy supplies have brought the euro back below parity with the dollar, despite expectations calling for the European Central Bank (ECB) to hike rates by 75 bp to 1.25% in its meeting this week. While the central bank could move to front-load rate increases as quickly as possible, any reference towards economic conditions eventually limiting its scope for tightening could put a cap on EUR/USD upside. The pair has been trading in a descending channel pattern since February this year, with its overall downward bias intact thus far. Further downside could leave the 0.960 level on watch, where the lower channel trendline may stand in place.

The closure of US markets today for Labour Day holiday may bring a quiet start to the new trading week with reduced liquidity, before focus are placed on comments by Fed officials, Lael Brainard and Jerome Powell, on Thursday. The firm stance to curb inflation by policymakers could be reiterated, which could potentially bring about little surprise. The key determinant factor for market sentiments could revolve around the US consumer price index (CPI) data next week. Until then, the S&P 500 could see some consolidating moves between its key support at the 3,915 level and the 4,000 resistance.

Asia Open

Asian stocks look set for a muted open, with Nikkei -0.44%, ASX -0.07% and KOSPI +0.17% at the time of writing. The failed attempt in Wall Street to tap on the US job report for a rebound last Friday could see the Asia session trading muted to lower today. Wider Covid-19 lockdowns in China have brought about a dampened risk environment as well, with the extension of lockdown curbs in Chengdu and the adoption of tiered restriction measures in Shenzhen. The day ahead will leave China’s Caixin composite and services purchasing managers' index (PMI) on watch, which is likely to reiterate ongoing weakness in economic conditions once more. The stronger US dollar at its fresh yearly highs could also serve as a weighing factor, with its general negative correlation with the MSCI AC Asia Pacific Index. Overall, the lack of positive catalysts could lead markets to drift lower in line with the ongoing bearish trend.

After a period of consolidation since August, the China A50 index has broken below its lower consolidation base, with the formation of a new lower low reinforcing its overall downward bias. This suggests that its key 23.6% Fibonacci retracement level has failed to hold, leaving the 13,000 level on watch as the next line of support.

On the watchlist: Brent crude back to retest key support ahead of OPEC+ meeting

Oil prices are faced with a series of opposing catalysts on the geopolitical front, with the Group of Seven (G7) countries’ plans to implement an oil price cap against Russian oil imports being met with retaliation by Russia to shut off the Nord Stream 1 pipeline indefinitely. The Organization of the Petroleum Exporting Countries Plus (OPEC+) meeting today will likely be the key driver for prices. Greater clarity will be sought on whether production cuts are on the table after that was brought up by its top producer Saudi Arabia last month, but with oil prices being back to retest its previous key support, expectations seem to be pricing for a lacklustre development on that front. Recent attempts to rebound has been short-lived and if the US$86.20 support level were to give way, a retest of the US$80.00 level could be next.

Friday: DJIA -1.07%; S&P 500 -1.07%; Nasdaq -1.31%, DAX +3.33%, FTSE +1.86%