Wall Street losing steam after its five-day winning streak: S&P 500, Hang Seng Index, GBP/USD

Market Recap

A downbeat mood in Wall Street saw some paring of losses with the release of the Federal Open Market Committee (FOMC) minutes, which was perceived by markets to lean towards a less-hawkish stance. This was reflected with the fall in US two-year bond yields, along with the US dollar, coming after its release. A look at the Fed Fund futures suggests that market participants are now pricing a 65% chance for a 50 basis-point (bp) hike at the September FOMC meeting, which is a significant revision from the 53% a week ago. The Federal Reserve (Fed) minutes highlighted that further rate hikes will continue although the pace could slow. This may not be much of a surprise but there was some acknowledgement of the risks that tightening might go too far in curbing economic activities, which suggests a more measured tightening approach could be taken with some eyes on growth conditions. Much will still lie on the Fed’s data-dependent stance and coming after the recent US consumer price index (CPI), upcoming data will be closely watched to substantiate the downside risks in inflation.

On the economic data front, the US retail sales for July were mixed with the headline level flat from the previous month. Consensus was for a 0.1% expansion. However, excluding autos, sales increased 0.4% month-on-month (MoM) against expectations of a 0.1% contraction. Looking towards August, lower gasoline prices and stronger auto production could lift consumer spending and the overall retail sales data is likely to provide the room for the Fed to tighten more aggressively if needed.

For the S&P 500, a retest of its 200-day moving average (MA) was met with some resistance, as the relative strength index (RSI) reverted from overbought conditions towards a more neutral level. In light of its ongoing upward trend since June this year, any retest of previous support will be on watch. That may leave the 4,200-4,225 level in focus.

Asia Open

Asian stocks look set for a negative open, with Nikkei -0.96%, ASX -0.35% and KOSPI -0.88% at the time of writing. The rollover in Wall Street overnight could drive some profit-taking in the Asia session today as well, coming after its stellar gains over the past one month. Some focus may be on the release of Tencent’s quarter two (Q2) results, which saw the company’s first-ever revenue decline as China’s weighing economic conditions drove a plunge in online advertising sales. Chinese regulators are yet to issue a new gaming licence to Tencent as well. Revenue fell larger-than-expected at 3% while net income plunged 56% in the June quarter. The company also cut 5,000 jobs.

On the flipside, outlook guidance seems to come with a more positive tone, as management highlighted a potential return to year-on-year (YoY) earnings growth ahead. China has also issued no new regulation this year. That said, with Tencent’s share price down 60% since its peak in February last year, earnings expectations this quarter have been low to begin with but the underperformance in both top and bottom-line could still weigh on its upside in the near term.

The Hong Kong HS50 has been attempting to hold above the 19,800 level, with some dip-buying reflected in the hammer candlesticks displayed on three occasions over the past one month. This level came with the key 23.6% Fibonacci retracement from February this year. That said, attempts to rebound from this level have been short-lived thus far, with bearish pressure quickly jumping in to limit its upside. Any break below the 19,800 level may potentially draw further downside to the 19,400 level next.

On the watchlist: Near-term double top formation for GBP/USD at risk

A 10.1% jump in UK headline inflation for July towered above expectations (9.8% forecast) and marked its highest since February 1982, with the jump in UK two-year government bond yields suggesting some market pricing for further aggressive moves from the Bank of England (BoE) ahead. However, heightened recession fears as a trade-off for tightening remains in the foreground, as a knee-jerk reaction in the GBP/USD to the upside eventually failed to sustain. The BoE has previously warned of a recession towards the end of the year, lasting until the end of 2023. On the technical front, a near-term double-top formation is at risk of a breakdown, as the 1.205 level is currently being tested. Further downside could leave the 1.180 level on watch next.

Wednesday: DJIA -0.50%; S&P 500 -0.72%; Nasdaq -1.25%, DAX -2.04%, FTSE -0.27%