Volatile end to last week, with more earnings up ahead: GBP/USD, China A50, Silver

Market Recap

The last trading week saw a 5% turnaround in major US indices after the US consumer price index (CPI) release, only to give back around half of the gains on Friday. With the third-quarter earnings season underway, earnings releases from US banks have delivered some hits and misses thus far. While the rising interest rates environment has provided a boost for their net interest income, the sharp moderation in economic conditions has taken a toll on their non-interest income, namely their investment banking segments. This was accompanied with a further build-up in credit reserves as a testament to the cloudy growth outlook ahead. Risk sentiments initially reacted well to the results, but the gains failed to sustain when the market opened. The sell-off was further exacerbated by the University of Michigan (UoM) consumer sentiment data, in which the rebound in inflation expectations seem to stoke worries about the persistence of pricing pressures once more. Three-year-ahead inflation expectations rose to 2.9% from 2.8%, while five-year-ahead expectations increased to 2.2% from 2%, as the impact from moderating energy prices have worked its effect and it may take more now to ease the inflation outlook. Further aggressive tightening from the Federal Reserve (Fed) seems to be the way to go, supported by comments from Fed voting member, James Bullard, who left the option of a 75 basis-point (bp) hike on the table in the December meeting. Markets are pricing a 63% chance of it happening.

Developments on the UK front also saw the replacement of ex-finance minister, Kwasi Kwarteng with Jeremy Hunt by Prime Minister Liz Truss, while u-turning on her previous promise not to go ahead the corporate tax rate hike. Market confidence in the new government’s credibility remains in question, with this attempt to soothe market concerns thus far failing to reverse the upward moves for Gilt yields. On the four-hour chart, the GBP/USD seems to be trading within a descending channel pattern after being weighed by US dollar strength and the uncertainty on the expiry of Bank of England (BoE)’s emergency stimulus program. That may leave any break above its upper channel resistance on watch, although a more concrete hint of a revival in market confidence could be a break above the 1.150 level.

Asia Open

Asian stocks look set for a negative open, with Nikkei -1.41%, ASX -1.60% and KOSPI -0.60% at the time of writing. US equity futures are pointing to some positive moves but the extent of gains fell way short of last Friday’s drawdown in Wall Street, pointing to a cautious mood overall. Dip buyers could still attempt to hold support into this week, with the muted 0.25% gain in the VIX seemingly paling in comparison to the sell-off.

Fresh updates from the China's Party Congress are being scrutinised, with the emphasis on technological advancement and national security seemingly brought up as high priorities for China’s longer-term direction. Further de-coupling from US technology seems to be the story, largely a follow-through response to the recent US CHIPS act. In line with earlier warnings, its zero-Covid-19 stance sees little shift in tone as well, pointing to an ongoing drag on the economy from virus restriction measures. But nevertheless, economic growth remains on the radar of policymakers, which suggests that more fiscal approach is the go-to option. The ‘common prosperity’ theme is highlighted as well, suggesting that big tech companies may remain under scrutiny. Overall, not too much surprises have been delivered so far, except the clear emphasis on technology advancement and national security.

The China A50 index has been trading within a descending channel pattern thus far and heading into the Party Congress, dip-buying has been seen with two consecutive days of bullish pin bar. For now, this kept the index above its previous March bottom, where policy support calls by authorities were being amplified. The level also marks a successful defend of the lower channel trendline support by dip buyers. With not too much of a surprise in the Party Congress thus far, one to watch on how the index will react into the upcoming week. Further upside could leave the upper channel trendline resistance on watch at the 13,200 level, while any breakdown of the channel pattern could suggest a leg lower to the 11,500 level over the longer term.

On the watchlist: Silver prices fall back to key support area at US$18.00

After a short-lived attempt to break higher, silver prices saw a massive sell-off last week as markets were repricing for a more hawkish build-up in Fed’s rate hike expectations, which translated to stronger US dollar and higher Treasury yields, both of which are headwinds for silver prices. This brought silver back to retest its key support around the US$18.00 area once more, where prices were supported on three previous occasions. Having largely traded in a range since July this year, one to watch if the support holds at the bottom range of the consolidation zone. Failure for the US$18.00 level to hold could potentially unlock further downside to the US$16.80 level next.

Friday: DJIA -1.34%; S&P 500 -2.37%; Nasdaq -3.10%, DAX +0.67%, FTSE +0.12%