Some wait-and-see after strong finish last week: S&P 500, China A50, US dollar

Market Recap

To end last week, a combination of a downward revision in consumer inflation expectations and some downplaying of recession risks by Fed member James Bullard have paved the way for some recovery in risk sentiments. A broad-based rally largely ensued, with all S&P 500 sectors in the green as greater catch-up continued to be seen among growth sectors. Being one of the data closely looked upon by the Fed, the final reading of the University of Michigan (UoM) five-year consumer inflation expectations eased to 3.1%, down from a preliminary reading of 3.3%. While the figure still marked its highest level since 2008, the Fed Funds futures have reflected some cooling of hawkish bets for a 75 basis-point (bp) hike in July. This was met with comments of overblown recession fears by Fed member James Bullard, although the final reading of consumer sentiment at its record low seems to suggest otherwise.

The relief rally (+7.3%) thus far has recovered slightly more than half of the 12% sell-off in the aftermath of the recent Fed meeting. That said, with the downward trend for the S&P 500 still intact, any formation of a new lower high will be on watch. The movement in the S&P 500 seems to be falling within a descending channel pattern for now and resistance at the upper channel trendline will leave the 4,000 psychological level in focus next.

Into this week, the ongoing Group of Seven (G7) meeting saw further pledge of support for Ukraine, which may not come as a surprise that the energy supplies issue will be here to stay. Further guidance on the economic outlook will remain on watch as the meeting heads into its second day. US equity futures were seen taking a breather after its strong rally on Friday, with market volatility expected to pick up with a series of central bank speakers’ appearances on Wednesday and the US Personal Consumption Expenditures (PCE) report release on Thursday. That will continue to leave any guidance of inflation, economic outlook and central banks’ policy as key drivers of market sentiments this week.

Asia Open

Asian stocks look set for a positive open, with Nikkei +0.90%, ASX +1.40% and KOSPI +0.47% at the time of writing. The strong rally in Wall Street to end last week may provide a positive backdrop for Asia markets today, although the question remains as to whether this marks another relief rally for a further leg lower. For now, overall sentiments may stay fragile, largely because the downward trend for equity indices remains intact and we have seen previous instances of a single event pertaining to inflation, economic outlook and central banks’ policies bringing back market jitters and reversing dip-buying sentiments.

Ahead today, China’s industrial profits will be in focus, where a continued recovery in economic conditions may play out. For the China A50 index, it seems to be bucking the trend for now as compared to its US counterparts, with the index breaking above the key 14,500 resistance level. Having largely traded within an ascending channel pattern since May this year, the 14,500 level marks the confluence zone of the upper channel trendline and a previous support-turned-resistance. The formation of a new higher high and the break of a key resistance seem to give it an upward bias.

On the watchlist: US dollar ticking lower as markets reassessed rate expectations

The US dollar has been retreating over the past two weeks as some profit-taking may occur with some cooling of rate hike expectations. Falling commodity prices to price for recession fears have translated into optimism that headline inflation could turn up lower in the coming months and eased some pressure off the Fed for its tightening process. With the downtick in consumer inflation expectations from its preliminary reading last week, the core PCE price index data release will be on watch next. Current expectations, however, are pointing to the headline PCE price index potentially ticking slightly to 6.4% from 6.3% in April. Therefore, some wait-and-see sentiments could play out in the lead-up to the data release. The US dollar index continues to trade in an upward trend for now, with an upward trendline on watch for any formation of a new higher low at the 103.20 level.

Friday: DJIA +2.68%; S&P 500 +3.06%; Nasdaq +3.34%, DAX +1.59%, FTSE +2.68%