Some attempts for US indices to stabilise after recent sell-off: Brent crude, Straits Times Index, EUR/JPY

Market Recap

The largely quiet economic calendar in the US left market sentiments to continue digesting the hawkish Federal Reserve (Fed) message from Jackson Hole to end last week, leaving equity markets in the red for the second straight session. Sector performance for the S&P 500 showed the energy sector being the outlier, pulling ahead from the rest with a 1.5% gain on higher oil prices. Defensive sectors such as utilities and consumer staples held up as well, as a reflection of the cautious lean in market sentiments. Shifts in Treasury yields continued to take the driving seat for market performance, with the US two-year yield moving higher to 3.42%, its highest level in 15 years. The US 10-year yields also ticked higher to 3.12%, leaving rate-sensitive growth sectors on the back foot. Overall, this comes on the back of shifting market expectations for a more aggressive Fed in its September meeting, with a 70% likelihood of a 75 basis-point (bp) hike being priced for now.

Comments from Fed members will continue to be in focus to drive expectations of rate outlook. Non-voting Fed member, Neel Kashkari, mentioned yesterday that he saw the recent market sell-off as evidence that the market is taking the central bank’s inflation fight seriously. His words came in line with the message that a dovish pivot is not being considered and rates could remain higher-for-longer.

Oil prices continued to make a new higher high overnight, with Brent crude prices hanging firmly above the key psychological US$100 level. This suggests an overall upward bias, coming after a break above a descending channel pattern last week. The Organization of the Petroleum Exporting Countries Plus (OPEC+) meeting will be on watch next week, with some expectations being priced for potential production cuts to restore market balance in light of any pass-through of the Iran’s nuclear deal. Adding to further tailwind for prices is the potential production outages in Libya, which could restrict some energy supplies into the market. Further up-move for Brent crude could leave the US$109.65 level on watch next.

Asia Open

Asian stocks look set for a positive open, with Nikkei +0.45%, ASX +0.36% and KOSPI +0.67% at the time of writing. The US equity futures this morning revealed market sentiments taking a breather after the recent sell-off, which could drive some attempts to stabilise for the Asia session today as well. That said, overall upside could remain limited with the lack of positive catalysts to cheer for now. The Asian economic calendar once again points to a quiet schedule and all eyes will fall on inflation figures out of the Eurozone later tonight, along with US consumer confidence data. Despite a firm start overnight, the Nasdaq Golden Dragon China Index eventually pared back on its gains to closed 0.8% lower. Pinduoduo’s earnings release may be the eye-catching headline, with its second-quarter profit more than tripled from a year ago, while revenue surpassed expectations as well. Its share price was up 15% overnight.

For the Straits Times Index (STI), recent downside has left the index to trade below the 3,250 level, which marks a confluence of support in line with an upward trendline resistance since December last year. The relief may be that downside could be more limited compared to the rest of the region, considering the index’s ‘more defensive’ status, while net institutional inflows continued to take place last week, although of a lesser scale. For now, the lower high provides a near-term bearish bias, with the index having to overcome the 3,250 level for a more sustained upside.

On the watchlist: EUR/JPY broke above ascending triangle pattern

The upward move in global bond yields tapping on the hawkish lean out of Jackson Hole seems to be driving markets to revisit some of the yield differential narrative, putting the EUR/JPY on watch. Near-term, the currency pair has broken above its ascending triangle pattern, with the formation of a new higher high giving the pair an upward bias. This will leave the 139.60 level in focus next, where a 23.6% Fibonacci retracement level stands in place. Economic data this week includes inflation data out of the Eurozone, which is likely to show headline pricing pressures inching closer towards a double-digit inflation. This will translate to increasing pressure for the European Central Bank (ECB) to tighten, at least in the near term, before the trade-off for growth kicks in to limit its rate increases.

Monday: DJIA -0.57%; S&P 500 -0.67%; Nasdaq -1.02%, DAX -0.61%, FTSE -0.70%