Lighter start to the week but risk-on prevails: Russell 2000, Hang Seng Index, AUD/USD

Market Recap

The second quarter has concluded with a further pull-ahead in risk sentiments last Friday, with the S&P 500 closing at its highest level in 14 months while the Nasdaq 100 index has turned in its second consecutive quarter of gains. Improving market breadth lately suggests that market gains have been broadening out, as a pushback in economic data against recession fears brought traction towards other economically-sensitive sectors for some catch-up performance. The equal-weighted S&P 500 index is at its highest since February this year.

Small-cap stocks have been seeing some signs of life as well, with the US Russell 2000 index back to retest its recent June 2023 high at the 1,900 level. Thus far, its Relative Strength Index (RSI) has retained above the 50 level, along with the formation of a new higher low last week, which kept the overall upward bias intact. The 1,900 level will serve as immediate resistance to overcome. Reclaiming this level could anchor in a new higher high and potentially pave the way for the index to retest the key psychological 2,000 level next, where its year-to-date high resides.

On the economic data front, market participants seem to take comfort in a lower-than-expected read from the US core Personal Consumption Expenditures (PCE) price index (4.6% versus 4.7% consensus), but more notably, the core services ex-housing component has come in at a new 10-month low on a month-on-month basis. Being highlighted previously by the Federal Reserve (Fed) as a gauge for inflation persistence, promising progress on that front has allowed the Fed more room to consider a rate pause after the July meeting. Fed funds futures continue to price for one last 25 basis-point rate hike from the Fed to conclude the hiking cycle.

The US dollar did not take the US inflation data well last Friday, turning in 0.45% lower despite some resilience in US Treasury yields. That allowed gold prices to see some relief (+0.53%) from recent sell-off, while silver prices are attempting to defend its 200-day moving average (MA) with some dip-buying towards the end of last week. Ahead, the US Independence Day holiday tomorrow may put a lighter trading session to start the week, with some focus on the US ISM manufacturing purchasing managers’ index (PMI) data release tonight.

Asia Open

Asian stocks look set for a positive open, with Nikkei +1.35%, ASX -0.01% and KOSPI +1.13% at the time of writing. Following a retracement from previous overbought technical conditions, the Nikkei has formed a new higher low on the daily chart, with long-legged candles pointing to some dip-buying at around the 32,300 level. The index is just 1% away from June 2023 high, which may leave any formation of a new higher high on watch over the coming days to reiterate its overall upward trend.

Across the region, a series of PMI data was met with some hits and misses, particularly with Japan’s factory activities falling back into contractionary territory in June (49.8 versus previous 50.6) while South Korea’s PMI also marked a deeper contraction (47.8 versus previous 48.4) as a reflection of the global economic slowdown. The day ahead will leave China’s Caixin PMI reading in focus. Following the subdued read in the official manufacturing PMI last week, the Caixin PMI is expected to reinforce the lacklustre economic conditions in China, which may support more to be done by authorities.

Thus far, the Hang Seng Index remains exhausted, with its RSI back below the 50 level while a descending wedge pattern stays in place after a short-lived attempt for a breakout. On the upside, it seems that a series of resistance needs to be overcome to reflect greater control from buyers, particularly the psychological 20,000 level, where the upper edge of the Ichimoku cloud resides on the weekly chart.

On the watchlist: AUD/USD on watch ahead of RBA’s interest rate decision this week

The AUD/USD has managed to touch its three-month high in mid-June, only to have a dovish surprise in the Reserve Bank of Australia (RBA) meeting minutes triggering a sharp retracement back below the 0.680 level. The strong pushback against previous hawkish expectations has forced a move back below its key 100-day MA for the pair, with the RSI hovering below the 50 level.

As the RBA meeting looms tomorrow, a significantly lower-than-expected Australia’s inflation data last week has left expectations leaning towards a rate pause but it may likely be a close call, with market still pricing for any pause to be a temporary move as compared to the end of tightening. The AUD/USD is currently back to retest a downward trendline support on the daily chart at the 0.660 level but much awaits. A series of resistance may have to be overcome to provide conviction of bulls taking back control, which includes its 100-day MA and the 0.680 level of resistance.

Friday: DJIA +0.84%; S&P 500 +1.23%; Nasdaq +1.45%, DAX +1.26%, FTSE +0.80%