US equity markets mixed with impending rate hike from the Fed: GBP/USD, STI, EUR/GBP

Market Recap

Major US indices were mixed (DJIA +0.28%; S&P 500 +0.13%; Nasdaq -0.43%) to kickstart the new trading week, as sector performance revealed investors’ positioning for the impending rate hike from the Fed this week. The rate-sensitive growth sectors saw a greater paring of risk positions and came in as the underperformers overnight, while the US Treasury yields ticked slightly higher across the board. On the other hand, the US dollar continues to face some downward pressure, with expectations for a 75 basis-point (bp) hike in the upcoming meeting having been largely priced. What matters could be the central bank’s forward guidance for the September meeting, which is still evenly split between a 75 bp (42% chance) and a 50 bp (58% chance) hike.

The US dollar index continues to trade within its consolidation zone on the four-hour chart, but recent bounces off the lower consolidation base has been short-lived, which increases the chances of a downward break ahead. A look at the GBP/USD suggests a falling wedge pattern in place, with recent moves retesting its upper wedge trendline in coincidence with a previous support-turned-resistance level at 1.207. One may watch for any break above the wedge pattern in the event of a weaker US dollar playing out, which could point to further upside towards the 1.232 level next.

Warnings of global growth risks continue to show up overnight, with Russia cutting gas supplies to Europe through the Nord Stream 1 pipeline once again (to 20% of normal capacity), while a further cut in profit outlook from Walmart suggests some cutback in general goods’ spending from consumers amid the inflationary environment. Walmart’s share price plunged close to 10% after-market, while Amazon was down close to 4%. Amazon will be releasing its earnings later this week on 28 July after-market. Other retailers were under pressure as well, with Target -5% and Costco -3%. Despite the slew of data pointing to ongoing growth slowdown, markets seem to have been accustomed to such narrative lately, riding on expectations that growth risks have been priced to a large extent. That will clearly be put to the test to a greater extent this week with a series of big tech earnings, Fed’s policy guidance, along with key US inflation and consumer sentiment data ahead.

Asia Open

Asian stocks look set for a mixed open, with Nikkei -0.35%, ASX +0.22% and KOSPI -0.05% at the time of writing. The wait-and-see sentiments in the lead-up to the Fed meeting this week may drive some paring down of risk positions. The VIX index turned in slightly positive overnight, potentially denoting some hedging of risks taking place. US-listed equities displayed some resilience, with the Nasdaq Golden Dragon China Index in positive territory overnight at 1.4%, but risks pertaining to virus cases and its property sector will continue to put a cap on risk sentiments.

From the latest SGX fund flow data, the STI has clocked up a six-week high for net institutional fund inflows last week, as the index posted a weekly gain of 2.7% in line with the improved risk sentiments across the global equities market. While this may be a positive sign for some relief, the inflow amount of S$97 million still trails behind previous outflow amounts, denoting that some reservations could still be in place among institutional investors. One to watch if the STI can attract further fund inflows from institutional investors over the coming weeks.

For the STI, the formation of a recent higher high and a higher low seems to provide a near-term upward bias for the index. Recent retracement was short-lived, with the index finding near-term support at its 50-day exponential moving average (EMA). That said, the 3,200 level will be a key resistance to overcome, with yesterday’s attempt pointing to a failed break for now. One to watch if the upcoming banks’ earnings this week and next week can provide an uplift for the index above the 3,200 resistance ahead. The banks’ net interest margins should see a strong catch-up to the interest rate upcycle environment, along with some resilience in loan demand in quarter two (Q2). The weak spot will be in terms of its non-interest income, which could see some paring back amid the moderation in economic conditions.

On the watchlist: Potential bearish flag in EUR/GBP for another leg lower?

Despite an attempt to recover over the past two weeks after a heavy sell-off, the EUR/GBP seems to be displaying a bearish flag pattern, with yesterday’s move marking a breakdown below the flag body and pointing to the potential of another leg lower. The release of flash composite Purchasing Managers' Index (PMI) reading for the Eurozone last week revealed an unexpected plunge into contractionary territory, with the downside risks for economic growth in the region once again presented in Germany’s Ifo index. The index took a dip to 88.6 compared to the 90.2 consensus, pointing to a more precarious outlook for economic conditions. This marks a divergence from recent UK PMI prints, which suggests conditions are more resilient than expected. Further downside for the EUR/GBP could place the 0.840 level on watch next, where a key 61.8% Fibonacci retracement level stands in place.

Monday: DJIA +0.28%; S&P 500 +0.13%; Nasdaq -0.43%, DAX -0.33%, FTSE +0.41%