Relief rally under pressure as risk sentiments remain fragile: S&P 500, China A50, EUR/GBP

Market Recap

The US equity markets attempted to bounce off their lows yesterday on comments from Fed Chair Jerome Powell, but some caution kicked in towards the last hour of the trading session. Overall risk appetite remains fragile in light of mounting recession concerns, with the lack of a clear positive catalyst thus far to drive confidence in market participants to take on more risk. Jerome Powell’s comments continue to display the central bank’s resolve in fighting inflation. While he has attempted to reassure markets of the current strength in US economic conditions at the start, he eventually conceded that a US recession is “certainly a possibility” and that a soft landing is “very challenging”.

These may be nothing new, but with his comments being the key (if not only) focus on the economic calendar, markets have reacted accordingly with a broad-based plunge in US Treasuries yields. The plunge in yields after his comments may signal some confidence in the Fed taming inflation as seen from the move lower in breakeven inflation readings, but also pricing for the increased recession risks as the trade-off. This is supported by lower commodities prices to reflect reduced demand on slowing economic growth.

For the weekly chart of the iShares 7-10 Year Treasury Bond ETF (IEF), it is seeking to validate a bullish hammer candlestick, bouncing off a key support at its 2014 and 2018’s lows. With that, further traction towards Treasury bonds remains likely in the near-term. With the 120-day correlation between the IEF and the S&P 500 reverting into positive territory recently, the S&P 500 may try to tap on any fall in bond yields for some relief. That said, the key 3,800 resistance level may have to be overcome, where any turn lower from current point may drive the formation of a new lower high and reiterate the downward trend for the index since the start of the year.

Asia Open

Asian stocks look set for a slightly positive open, with Nikkei +0.77%, ASX +0.59% and KOSPI +0.33% at the time of writing. The Asia’s session may continue to see growth worries being the key overhang for risk sentiments, driving a cautious mood overall. Ahead, a series of purchasing managers index (PMI) readings from major economies will be on close watch to provide fresh update on economic conditions. Some focus will be on firms’ outlook of pricing pressures, coming at a time where market participants are actively sourcing for signs of peaking inflation. Any information pertaining to supply chain shortages will also be scrutinised, with its pace of easing being one of the key determinants pertaining to the persistence of inflation.

The day ahead will also see the release of Singapore’s consumer price index (CPI) data for May. Along with the persistence in global inflationary pressures, Singapore’s inflation is likely to trend higher with higher costs of food and energy. Thus far, Singapore’s CPI has shown little signs of easing and if inflation continues to turn in higher, it may translate into greater pressure for further tightening from the Monetary Authority of Singapore (MAS) in October. Any upside surprise in the inflation reading may be a near-term catalyst for Singapore Dollar’s strength.

For the China A50, the index has been largely trading in an ascending channel pattern since May this year, with recent retest of the upper channel trendline met with some resistance. Trading within the channel may leave the 13,500 level as a key support to watch, where a horizontal support coincides with the lower channel trendline.

On the watchlist: EUR/GBP inching above resistance ahead of PMI releases

The EUR/GBP has been trading on an upward trend since April this year with a series of higher highs and higher lows. Recent upside has seen the currency pair breaking above a key resistance at the 0.860 level, where a 23.6% Fibonacci retracement stands in place. Expectations of more aggressive moves from the European Central Bank (ECB) remains the positive catalyst in driving the euro, along with the risks of stagflation presented for UK as its recent CPI continues to move higher at a time of muted economic growth being guided ahead. Near-term, the 0.860 level may serve as a resistance-turned-support level, while the currency pair may potentially move to retest the 0.867 level next.

Wednesday: DJIA -0.15%; S&P 500 -0.13%; Nasdaq -0.15%, DAX -1.11%, FTSE -0.88%