Risk sentiments attempting to recover after last week’s sell-off: DJIA, USD/JPY, Gold

Market Recap

Coming after last week’s 5% sell-off for the S&P 500, US equity markets are attempting to recover some of its losses after the Juneteenth holiday break (DJIA +2.15%; S&P 500 +2.45%; Nasdaq +2.51%). Headwinds surrounding tightening financial conditions and the trade-off for an economic downturn continues to loom in the background, and the rebound may be attributed more towards technicals being traded at near-term oversold levels. The relative strength index (RSI) indicators for major US indices are reverting from oversold territory towards the more neutral zone, while the Nasdaq 100 index is showing a bullish divergence.

However, there has not been much relief on the economic data front yesterday. US existing home sales continue to fall for the fourth consecutive month, with further declines to be expected ahead on a higher interest rate environment. The Chicago Fed National Activity also reflected a sharp cooling in economic conditions from the previous month, delivering a reading of 0.01 in May, which is far below the 0.35 consensus. These data seems to be in line with the underperformance in economic conditions in recent months, as reflected by the Citi economic surprise index pushing to its lowest level since May 2020.

For now, the fundamental catalyst for a more sustained rebound seems fragile, with all eyes on Fed Chair Jerome Powell’s testimony ahead to further drive expectations of policy outlook and inflation. Inflation data out of UK and Canada will also be in focus, where headline pricing pressures for both countries are expected to show no relief from the previous month. Any outperformance could be a catalyst to bring inflation jitters back. The DJIA is currently retesting a previous support-turned-resistance level at 30,600, where a lower channel trendline seems to be in the way as well. The overall trend remains downward-bias, with one to watch for any potential formation of a lower high ahead. Near-term support may be at the 29,600 level.

Asia Open

Asian stocks look set for a mixed open, with Nikkei +0.12%, ASX +0.15% and KOSPI -0.85% at the time of writing. The overnight rebound in Wall Street may provide a positive backdrop for Asian equities but gains may seem capped by some wait-and-see sentiments, heading into Fed Chair Jerome Powell’s comments today. US-listed Chinese stocks delivered a strong showing, with the Nasdaq Golden Dragon China Index up close to 5% overnight. The day ahead in the region may bring focus to the release of the Bank of Japan (BOJ) minutes release, along with Australia’s Westpac leading index.

The BOJ minutes provided confirmation that the central bank easing stance may be here to stay, with additional easing steps to be taken if necessary. This seems to reiterate that its accommodative stance will be here to stay for longer, with the recent pushback against any tweak to its policies driving USD/JPY (大口） higher on widening yield differentials. The currency pair is currently at its 24-year high, with the formation of a new higher high reiterating its upward trend. Longer-term technicals may place the 140.80 level on watch as potential resistance.

On the watchlist: Gold prices finding resistance at key Fibonacci level

Gold prices have been trading on lower highs since March this year, as a rise in US 10-year real yields to reflect the Fed’s tightening stance translates to downward pressure for the non-yielding yellow metal. Some resilience in the US dollar overnight also failed to provide much reprieve for its prices. Having broken below a near-term consolidation zone, a retest of the US$1,850 level was met with a bearish rejection. This is where a key 76.4% Fibonacci retracement level stands in place. With the downward bias for gold prices, further downside may leave the US$1,800 level on watch next.

Tuesday: DJIA +2.15%; S&P 500 +2.45%; Nasdaq +2.51%, DAX +0.20%, FTSE +0.42%