Risk-off mood to continue into the new trading week: S&P 500, Straits Times Index, US Dollar

Market Recap

The conclusion of the Jackson Hole speech by Federal Reserve (Fed) Chair Jerome Powell was met with an immense risk-off mood in markets (DJIA -3.03%; S&P 500 -3.37%; Nasdaq -3.94%), with the hawkish takeaway driving rate expectations to lean further towards a 75 basis-point (bp) hike in the September Federal Open Market Committee (FOMC) meeting with a 62% probability. Market expectations riding on the peak-inflation narrative were hoping to see some confirmation signs of a dovish pivot, but the higher-for-longer stance for rates seems to be the story from the comments. In his speech, Jerome Powell remarked that ‘restoring price stability will likely require maintaining a restrictive policy stance for some time’ and that ‘the historical record cautions strongly against prematurely loosening policy’. He also mentioned that ‘reducing inflation is likely to require a sustained period of below-trend growth’ and ‘we (Fed) will keep at it until we are confident the job is done’.

The pushback against a dovish pivot last Friday drove an aggressive unwinding of previous dovish bets with a broad-based sell-off across all 11 S&P 500 sectors as the VIX surged to its one-month high. US Treasury yields saw some upward revisions, with the two-year yield climbing to 3.45% this morning, its highest since November 2007. The week ahead will keep market volatility in place, with the release of the US August non-farm job report as the key market risk event. With US job gains having towered above expectations for the fourth consecutive month since April this year, another blowout reading will further raise the risk of more aggressive tightening from the Fed.

The S&P 500 saw a decisive break below its previous 4,087 support last Friday, which will now turn into a resistance level to overcome. The 3,915 level could be on watch this week, where a 23.6% Fibonacci retracement level stands in place.

Asia Open

Asian stocks look set for a negative open, with Nikkei -2.47%, ASX -1.86% and KOSPI -2.27% at the time of writing. The risk-off mood is playing out in the Asia’s session today as well, as bearish sentiments follow through with the sell-off in Wall Street to end last week while US futures continue to suggest no reprieve into the new week. Economic data over the weekend also painted a downbeat picture of China’s economic conditions, with its January-July industrial profits sinking 1.1% from a year ago and wiping out the 1.0% growth logged during the first six months. Fresh Covid-19 restrictions continue to drag down demand, while power shortages due to heatwaves weighed on production. Overall, the data reinforces a lower-for-longer situation for China’s economy and while further policy support has been surfacing in recent weeks, a consistent recovery in economic readings are much needed to spur market confidence of policy success for a more sustained market recovery.

The largely quiet economic calendar today will bring de-risking as the key market theme as central banks show no signs of letting loose on policies. Comments from Bank of Korea (BOK) Governor, Rhee Chang-yong, suggests that the BOK likely will not halt tightening before the Fed. Ahead this week, inflation data out of the Eurozone will likely show no signs of reprieve in pricing pressures, translating to further pressure for central bank’s tightening process. Fed commentaries remains in the spotlight as well, with Fed vice-Chair Lael Brainard speaking later tonight.

After consolidating at a key support around the 3,250 level over the past week, the STRAITS failed to hold above the level, with a gap lower this morning on the global risk-off mood. This may leave the 3,186 level on watch next, where a key 23.6% Fibonacci retracement level stands in place.

On the watchlist: US dollar holding up near 20-year high after hawkish takeaway from Jackson Hole

The hawkish takeaway from Fed Chair Jerome Powell’s comments at Jackson Hole has seen the US dollar holding up near its 20-year high, as a hammer candlestick reflects the dollar bulls remaining in control. On the four-hour chart, a bullish flag seems to have been formed. This could drive the dollar index to attempt another retest of the 108.95 level next, which marks its peak back in July this year. A break above that level could signal a new leg higher. All eyes will now be on the US job report this week, where another blowout figure could likely reinforce talks of a hawkish Fed and looked upon as a source of strength for the dollar ahead.

Friday: DJIA -3.03%; S&P 500 -3.37%; Nasdaq -3.94%, DAX -2.26%, FTSE -0.70%