Some much-needed relief for Wall Street overnight: Russell 2000, USD/CNH, GBP/USD

Market Recap

Follow-up action by the Bank of England (BoE) to support its bond market through temporary bond purchases has provided some much-needed relief to recent market jitters, with the downward moves in UK government bond yields dragging US Treasury yields lower as well. The improved risk environment with some hopes of financial stability returning to UK also translated to a 1.7% move lower in the US dollar. Those were positive news for the equities market, which were heavily in need of a relief catalyst for some reversion from oversold technical conditions and market breadth in recent days. Major US indices managed to reclaim their mid-June lows but more follow-up action from dip buyers could be needed to dictate a firmer shift in stance.

Apple’s pullback on its plans to lift production has caused its share price to trade lower (-1.27%) despite the broad-based recovery in US equities overnight. The guidance coming from the world's largest company added to the list of worries for macroeconomic conditions ahead. While an overnight recovery in risk sentiments has allowed its share price to pare back on some losses, the formation of a new lower low reinforces its ongoing downward trend since its mid-August peak. Trading in line with its downward bias may bring about an eventual headwind for US equity indices (Apple accounts for 7.5% weightage of S&P 500, 3.5% of DJIA and 14% of Nasdaq 100). This supports the view of any upside potentially being more of a bear relief rally, rather than a full-on recovery.

The outperformance in the Russell 2000 index provided testament to the improved risk appetite overnight, with the index managing to defend its June bottom for now. That said, trading along with the current downward trend will suggest looking out for a formation of a new lower high, which could leave the 1,780 level on watch in the near-term. The increased risks of recessions remain a key catalyst that could haunt risk sentiments, as further moderation in economic conditions are set to take place over the coming months. This comes along with the deep inversion in the two-year/10-year Treasury yield curve and a downward revision in real gross domestic product (GDP) estimate from Atlanta Federal Reserve (Fed) data to a mere 0.3% growth in quarter three (Q3) from the 2.6% at the start of the month.

Asia Open

Asian stocks look set for a positive open, with Nikkei +0.76%, ASX +1.67% and KOSPI +1.48% at the time of writing. The strong performance in Wall Street with broad-based gains across all sectors provided a positive backdrop for some relief in the Asian session, after suffering weeks of heavy sell-off. The energy sector may be on watch with the 4.5% recovery in oil prices, and the outperformance in the energy sector overnight may be mirrored in the Asia session as well.

The Chinese yuan at a 14-year low against the US dollar has prompted a warning from the People’s Bank of China (PBOC) against speculative bets on the exchange rates, with ongoing divergence in policies and yield differentials remaining as the key driving force for the pair. The USD/CNH is currently retesting the 7.200 mark once more after failing to overcome it yesterday, with the formation of a bearish shooting star candlestick riding on the weakness in the US dollar. The relative strength index (RSI) in deep overbought region may be supportive of some moderation to the downside, but a greater conviction may come from a move below the 7.138 level as buyers were seen defending close to this level overnight. The overall upward trend remains, leaving the formation of a new higher low on watch in the event of any near-term retracement on technical conditions.

On the watchlist: GBP/USD finding some relief on BoE’s action but overall downward trend may be hard to reverse

The intervention of the BoE to address recent financial ‘instability’ has been well-received by the GBP/USD but setting a strict time limit until 14 October seems to be a move to buy some time until the November meeting. Current market expectations are still pricing for some follow-up action by the central bank in terms of rate hikes, with 125 basis-point (bp) being looked upon in November with a 62% probability. That could still seem to be a lean towards the aggressive end and failure to deliver up to market expectations could run the risk of further weakness returning to the pound. Before the fiscal plan was announced, the GBP/USD has already been trading on a downward trend with the looming risks of recession into the fourth quarter and it seems that it will take much more to reverse its downward trend. Near-term, the currency pair may have to overcome 1.092 level for a more convincing move higher to the 1.125 level next. The 1.125 level will ultimately serve as a greater test of resistance for the pair, which marks the first initial downside reaction to the whole narrative.

Wednesday: DJIA +1.88%; S&P 500 +1.97%; Nasdaq +2.05%, DAX +0.36%, FTSE +0.30%