Relief rally on a pause with defensive lean: Nasdaq 100, Nikkei 225, EUR/USD

Market Recap

After recovering close to 8% from its post-Fed bottom, the relief rally for US equity markets took a pause overnight, as US Treasury yields resumed its upward trajectory and weighed on the rate-sensitive Nasdaq. Stronger-than-expected data were presented in the US durable goods orders and pending home sales but initial market gains arising from economic resilience failed to sustain. This may come as some sentiments may have been riding on a retracement in commodities for hopes of easing inflation, but a 2.5% uptick in oil prices overnight seems to put some resistance to that narrative. This may lead to some adjustment in expectations around inflation and monetary policy, as seen from the higher bond yields.

Overnight sector performance revealed a defensive lean from market participants, with energy leading the way higher, along with outperformance in the healthcare and utilities sectors. That said, market breadth in oversold conditions may still keep hopes of the relief rally alive, while the VIX has also trended lower overnight in what should generally have been an inverse relationship with the equity indices. For the US Tech 100, it is currently hanging at a key confluence zone of resistance, where a previous horizontal support-turned-resistance stands in place alongside a near-term downward trendline and its 50-day moving average (MA) line. A break above this level may lift hopes for a subsequent retest of the 13,000 level next for a formation of a new higher high in the near-term.

Asia Open

Asian stocks look set for a muted open, with Nikkei +0.03%, ASX +0.21% and KOSPI +0.29% at the time of writing. Some caution seems to be setting in with the lead-up to a series of central bank speakers’ appearances on Wednesday and the US Personal Consumption Expenditures (PCE) report release on Thursday, where fresh clues on inflation and central banks’ policies will be on watch. Signs of resilience seems to be presented in Chinese equities lately, with the Nasdaq Golden Dragon China Index breaking above its resistance at 7,950 to deliver a four-month high. Positioning for a recovery in China’s economic conditions ahead may be at play, with comments from the People's Bank of China (PBOC) Governor yesterday once again reiterating that supportive policies will be here to stay. The higher highs and higher lows in the index thus far seem to reveal a near-term upward trend. Otherwise, the quiet schedule on the Asia’s economic calendar today may seem to drive some wait-and-see, as the release of US consumer confidence data will be in focus next.

The recent relief rally has brought the Nikkei 225 index to retest a key resistance at the 27,000 level once again, where a key 38.2% Fibonacci retracement level stands close to a downward trendline in place since September last year. With that, a zone of strong resistance seems to be established and failure to reclaim above the trendline may reiterate the ongoing downtrend.

On the watchlist: EUR/USD facing a make-or-break moment at the 1.060 level

The ongoing retracement in the US dollar has lifted the EUR/USD by 2.3% over the past two weeks, but the currency pair seems to be facing a moment of reckoning with a current retest of key resistance at the 1.060 level. Having traded within a descending channel pattern since February this year, the level marks a key upper channel trendline resistance, which has weighed on the pair on at least four occasions this year. While the short-lived retracements for the EUR/USD over the past weeks may suggest that the bulls are attempting to regain greater control, the 1.060 level could be crucial to watch, where any failure to move past the descending channel will reinforce the current downward trend and potentially bring the pair back to the 1.035 level.

Monday: DJIA -0.20%; S&P 500 -0.30%; Nasdaq -0.72%, DAX +0.52%, FTSE +0.69%