Sentiments took a turn after post-Fed bounce: Russell 2000, USD/JPY, EUR/CHF

Market Recap

The knee-jerk rally coming after the Federal Open Market Committee (FOMC) meeting has proven to be short-lived as sentiments quickly took a turn yesterday, following the surprise hike from the Swiss National Bank (SNB). Its first rate hike in 15 years of 50 basis-point (bp) added to global tightening jitters as it highlighted the resolve from global central banks to react aggressively to inflationary pressures, reviving concerns of recession risks in the process as well. Increased recession risks may have already been presented in the Fed’s latest economic projections but while markets were attempting to shrug it off with a post-Fed bounce, sentiments clearly remain highly sensitive to global developments pointing to tighter liquidity and slower growth. The SNB further guided that more tightening may be needed, which highlights the urgency for the central bank to react to inflationary pressures with a stronger currency.

On another front, the Bank of England (BOE) raised rates by 25 bp, which is in line with expectations but signals the likelihood of larger hikes ahead. Raising its inflation forecast to above 11% and providing guidance that the economy may contract in the current quarter seems to be underlining the stagflation theme, which failed to provide any form of relief for overall risk sentiments as well.

The Russell 2000 is currently trading below its pre-Covid level back in February 2020, with its downward bias intact with the formation of a new lower low overnight. Its pre-Covid peak at the 1,705 level, in coincidence with a 50% Fibonacci retracement level, may serve as resistance to overcome while near-term support may be found at the 1,600 level.

Asia Open

Asian stocks look set for a negative open, with Nikkei -2.28%, ASX -2.57% and KOSPI -1.55% at the time of writing. The overall downbeat mood in Wall Street yesterday were being carried into the Asia’s session, from which the latter is expected to remain under pressure in the absence of any positive catalysts for now. Ahead, the surprise hike from the SNB has driven some speculators to front-run and position for a potential hawkish surprise from the Bank of Japan (BoJ), which will be concluding its monetary policy meeting today. Widening yield differentials from policy divergence with the US have driven the Japanese yen to trade at its lowest level in 24 years, with some immense selling for Japan’s 10-year government bonds (JGBs) in recent days suggesting that speculators are seeking to challenge the central bank’s status-quo.

The likely scenario may still point towards the BoJ delaying any move for now while waiting for a significant pickup in wage gains, but anxiety is clearly running high with the upcoming BoJ meeting being looked upon to provide any reassurances of a no-change in policies. Any status quo may drive some unwinding of hawkish bets, potentially providing a catalyst for some relief in the USD/JPY (大口） ahead. The currency pair remains in an upward trend, with near-term support to watch at the 131.00 level.

Closer to home, Singapore’s non-oil domestic exports (NODX) for May came in above expectations (12.4% year-on-year versus 7.6% expected), riding on low base effect and improved exports to Malaysia, Indonesia, Thailand and Japan. While that points to some resilience in the country’s trade activities, market movement is likely to take greater cues from global sentiments, potentially leading to a lacklustre session today.

On the watchlist: EUR/CHF plunges on surprise rate hike from the Swiss National Bank

The hawkish surprise by the SNB has driven a surge in Swiss franc, where general consensus was widely expecting a no-change from the central bank. The EUR/CHF plunged more than 2% yesterday, with a break below a key downward trendline suggesting a strong reversal in sentiments. While there may be an attempt to pare back some losses after the heavy sell-off, the pair is currently finding resistance at the 1.022 level, where a key 38.2% Fibonacci retracement seems to stand in the way. With the recent move pointing to the resolve from the central bank to act against the upside risks of inflation, it may seem to provide an overall bullish bias for the franc, which translates to potential further weakness for the currency pair. Near-term support to watch may be at 1.012.

Thursday: DJIA -2.42%; S&P 500 -3.25%; Nasdaq -4.08%, DAX -3.31%, FTSE -3.14%