Risk rally put to test in busy week: S&P 500, Nikkei 225, AUD/USD

Market Recap

Despite some pockets of disappointment from US big tech companies’ earnings, major US indices managed to deliver a strong rally to end last week. Some expectations that the Federal Reserve (Fed) could guide for a lower tightening gear this week could be at play. A 75 basis-point (bp) hike in November seems like a done deal, but markets are still hopeful that a 50 bp hike could come in December, with expectations pricing it at a 64% probability. The tone from Fed Chair Jerome Powell will be important, with markets likely to scrutinise for any increased concerns on economic conditions or further emphasis on the central bank’s data-dependent stance, as compared to the current head-on resolve to tame inflation.

Market participants may also be finding relief that the release of US core Personal Consumption Expenditures (PCE) data on Friday did not provide an inflation upside surprise, with the year-on-year (YoY) reading coming in slightly lesser than expected (5.1% versus 5.2% consensus). The outperformance in personal spending and 1.2% increase in employment cost in quarter three (Q3) still point towards persistence in pricing pressures, but that seemed to be shrugged off for now, with markets posing a similar disregard to the recent outperformance in US Consumer Price Index (CPI) data this month. The equities rally came despite some strength in the US dollar, supported by a significant move higher in US Treasury yields (US 10-year back above 4%). If the strength continues into this week, it could translate into some headwinds to challenge the recent rally.

For now, a retest of the key 3,800 level for the S&P 500 was met with a strong bullish rejection. Market breadth suggests that there may be more room for further upside, but several catalysts this week will have to provide the go-ahead. Other than the US Federal Open Market Committee (FOMC) meeting, the US job reports will be in focus as well, which equity bulls may want to see a quicker-than-expected moderation in the US labour market. The 3,800 level remains as a key confluence of support to hold, while further upside could leave a retest of its 200-day moving average (MA) at the 4,100 level.

Asia Open

Asian stocks look set for a positive open, with Nikkei +1.23%, ASX +0.99% and KOSPI +0.47% at the time of writing. That said, despite the strong showing in Wall Street, Chinese equities seemingly failed to tap on the improved sentiments, with the Nasdaq Golden Dragon China Index trading 3.2% lower. The lack of a concrete relief catalyst continues to leave market participants shunning. On the flipside, the outperformance in Nasdaq could support sentiments for the tech-exposed Nikkei into today’s session, coming after a higher-than-expected September retail sales read this morning (4.5% YoY versus 4.1% consensus). This was pitted against a weaker-than-forecast industrial production, as supply chain disruptions and cost pressures from a weak yen continue to pose a negative impact on production.

For now, the Nikkei 225 index managed to hold above an ascending triangle pattern, with the formation of a new higher high last week providing a near-term upward bias. Recent retracement has been short-lived, buoyed by the improved risk environment as reflected in the continued weakness in VIX. Looking ahead, China’s manufacturing Purchasing Managers' Index (PMI) reading will be released later today, which is likely to reinforce the lower-for-longer growth picture – not too much of a surprise for markets by now. An expected reading of 50 runs the risk of a potential contraction, which could lead sentiments towards Chinese equities to remain measured.

On the watchlist: AUD/USD on watch ahead of RBA meeting this week

The AUD/USD has recently struggled to cross a near-term downward trendline, after finding a confluence of resistance at the 0.655 level, where the pair was resisted for the third occasion since end-September this year. This week could be a busy one for the pair, with an anticipated policy divergence to be revealed between the Reserve Bank of Australia (RBA) and the Fed, while China’s lower-for-longer growth picture may be likely to be reflected in its PMI figures as well. These two factors have been the key headwinds driving the overall downward trend for the AUD/USD over the past months, therefore selling pressure could be lurking from the sidelines without any positive surprise. For now, a cross above the 0.655 level could be warranted to provide greater conviction for a near-term upward bias. Any upward break may potentially bring a move to retest the 0.670 level next.

Friday: DJIA +2.59%; S&P 500 +2.46%; Nasdaq +2.87%, DAX +0.24%, FTSE -0.37%