Risk-off mood with no let-up in US CPI print: S&P 500, Straits Times Index, Gold

Market Recap

Risk sentiments took a beating towards the latter half of last week, as previous hopes of peaking US inflation were overturned with the release of the higher-than-expected US CPI print. To recall, US consumer prices had surged to a new 40-year high at an 8.6% increase from the previous year, surging above the expected 8.3%. The core CPI came in at a 6% increase versus 5.9% consensus. While high costs of gasoline and food prices remain as significant contributors to the high inflation reading, the addition of broad-based gains in shelter prices, along with airline fare and vehicles costs have exacerbated the inflation reading. The broad-based persistence in inflation suggests that targeted measures may seem limited in holding down overall price increases and policy tightening to reduce demand remains the preferred approach.

Rate hike bets for Fed’s tightening were ramped up aggressively as seen from the Fed funds futures, translating into a surge for US Treasury yields as well. Amid the surge in yields, the flattening of the curve also reflects underlying concerns of the impending trade-off for economic growth. Adding to the risk-off mood was US consumer sentiments plunging to a new record low at 50.2 on inflation concerns – a huge miss from the forecast of 58.0. With that, the relief rally for US equity indices has come to a halt, with the recent sell-off pointing to the formation of a new lower high and reinforcing the ongoing bearish trend. A previous bullish pennant for the S&P 500 to mark any continuation of the relief rally was invalidated with the absence of any upward break of the symmetrical pattern and hence, equity bulls may have to await another signal for long positions.

The new trading week will see the FOMC meeting as the top risk event. A 50 basis-point hike seems more or less a done deal, but the fresh round of economic projections will be scrutinised for clues of how aggressive the Fed may have to be towards the fourth quarter. Global central banks’ guidance thus far have leaned towards the aggressive end of the tightening spectrum, suggesting that a let-up towards rate hikes from the Fed may be unlikely. Economic data out of China (fixed asset investment, industrial production, retail sales) will also be in focus, along with US retail sales and producer prices’ reading.

Asia Open

Asian stocks look set for a negative open, with Nikkei -2.64%, KOSPI -2.43 and NZX -1.40% at the time of writing. The ASX will be closed for trading today due to holiday. The dip in risk sentiments from last week has shown no signs of cooling thus far, with the US equity futures resuming its decline in the Asia’s morning session. Market sentiments may continue to react to the upside risks to bond yields as aggravated by the US CPI release, which may translate into downside for equities. In addition, previous optimism surrounding China’s reopening may also take a pause, as the resumption of mass-testing in Beijing and Shanghai seems to place Covid-19 risks at the forefront once again. Although US-listed Chinese shares seem more resilient last Friday as compared to the fall in US equities, the overall downbeat mood may still keep market participants from taking on excessive risks, with the added uncertainty of the situation evolving into a repeated lockdown.

For the STI, last week’s sell-off has marked a break below a key upward trendline which has been supporting the index on at least seven occasions since November 2020. A break below the trendline may suggest bearish sentiments taking greater control and that may leave the 3,000 psychological level on watch over the longer term.

On the watchlist: Gold prices seeking to break above consolidation pattern

Gold prices have been largely trading within a consolidation pattern over the past three weeks, with recent move seeking an upward break of the pattern at its one-month high. While the upside surprise in US CPI data points towards more aggressive tightening from the Fed, gold’s status of a safe-haven asset and an inflation hedge seems to be taking greater control of sentiments for now. Near-term, the US$1,890 will serve as a key resistance to overcome, where a 61.8% Fibonacci retracement level lies from its January’s bottom to its peak in March this year. Any break above the level may potentially unlock further room towards the US$1,960 level next.

Friday: DJIA -2.73%; S&P 500 -2.91%; Nasdaq -3.52%, DAX -3.08%, FTSE -2.12%