US markets to provide gauge of risk sentiments after holiday: S&P 500, AUD/JPY, GBP/USD

Market Recap

With US markets closed for holiday, the European markets overnight provided a negative footing to digest, with stocks largely trended in the red. Disruptions of energy supplies in the region following the closure of Nord Stream 1 remains the key overhang for risk sentiments. However, with mitigating fiscal measures kicking in to provide support to utilities companies and households, the near-term downside risks could seem more measured before recession fears kick in once more towards the rest of the year. The US futures are largely displaying some attempt to stabilise after its recent sell-off, but eyes will remain on Treasury yields moves as any resumption of its upward trajectory could serve as a headwind for upside.

The S&P 500 continues to hang at a key confluence of support at the 3,915 level, where a resistance-turned-support coincides with an upward trendline and previous dip-buying efforts were observed at this point as well. Any near-term attempt to recover could drive a retest of the 4,087 level but with the overall downward trend intact, the way to go seems to be watching for any formation of a new lower high as a continuation of the ongoing downward trend.

On the oil front, the Organization of the Petroleum Exporting Countries Plus (OPEC+) meeting concluded with a small oil production cut of 100,000 barrels per day, amounting to only 0.1% of global demand. Oil prices does not seem to be too impressed with the extent of production cut as some doubts of its overall impact linger, which drove some paring back of previous gains. Brent crude prices continue to hang at a key support at the US$92.87 level, which has held up prices on at least five occasions. Any subsequent break below this level could provide further downward bias and leave the US$86.00 level on watch next.

Asia Open

Asian stocks look set for a slightly positive open, with Nikkei +0.27%, ASX +0.36% and KOSPI +0.66% at the time of writing. Further indication of China’s accommodative stance was displayed yesterday once more, as it proclaimed to accelerate its stimulus rollout in the third quarter. The central bank also reduced the amount of foreign-exchange deposits banks need to set aside as reserves to boost the ailing yuan. Such supportive moves may aid to provide a near-term uplift in risk sentiments, but past instances suggest that markets ultimately want to see a stronger recovery in economic conditions as a gauge of policy success amid its ongoing zero-Covid-19 stance and property sector risks.

The Reserve Bank of Australia (RBA) meeting later today is expected to deliver another 50 basis-point (bp) hike to 2.25%, which will bring its cash rate into the ‘neutral’ zone and lead to more-measured contractionary moves over the next few meetings. That said, with the recent hawkish tone from the US Federal Reserve (Fed), it could set the tone for the RBA to be more cautious in signalling for any policy shift and the central bank will likely maintain its data-dependent stance with some risks of a hawkish rhetoric. Ahead of the RBA meeting, the AUD/JPY has been consolidating at key resistance at the 96.00 level lately, having pushed above a previous descending channel pattern. Retracement from the resistance thus far has been short-lived, with the pair holding up despite the dampened risk environment. Any attempt for the risk environment to stabilise over the coming days could serve as a near-term tailwind for the pair, with the 96.00 level on watch as a key resistance to overcome for a formation of a new higher high and a reinforcement of its ongoing upward trend.

On the watchlist: GBP/USD attempting to hold its March 2020 low

The announcement of Liz Truss as the next UK Prime Minister may aid to remove a key overhang for the GBP on the political front, but the GBP/USD was only met with a modest rebound as it attempts to stay above its March 2020 low. This could reflect some reservations as to how the new leadership may uplift the economy, which is heading into a prolonged recession later this year. Upcoming fiscal support will be closely looked upon, with her pledge of a ‘bold plan’ to address tax cuts and the energy crisis, which still require greater clarity at current point in time. Since the start of the year, the GBP/USD has been trading within a descending wedge pattern, with the pair attempting to find support at its lower wedge trendline recently. The oversold level marked by the relative strength index (RSI) may drive an attempt to pare back some losses, which could lead to a retest of the 1.172 level but with the longer-term trend still leaning towards an overall downward bias, any retest of resistance will be on watch for the formation of a new lower high.

Monday: US markets closed for holiday, DAX -2.22%, FTSE +0.09%