Tug-of-war for Asia markets

Recession risks vs Fed support

It had been a pivotal week for US monetary policy with Fed chair Jerome Powell now falling behind the voices suggesting that the Fed will be ready to move to sustain the economic expansion. For a market currently pricing in two rate cuts by year-end according to the CME FedWatch tool, this alignment by the Fed had certainly lit a fire under the markets.

Amid the contemplation as to whether the Fed could move soon, we have certainly also heard from the likes of Federal Reserve Bank of Chicago president Charles Evans pushing back against the idea of any imminent rate cut. The Fed president acknowledged the lack of inflation, but also highlighted the strong fundamentals.

Source: IG Charts

What the Fed needs, perhaps is a little more nudge in economic conditions to warrant the need to move. This may include further escalations in trade tensions and signs of deterioration in the labour market conditions, things we may be checking off this week. As it is, CNBC had reported on US and Mexico trade officials failing to reach a deal prior to the June 10 tariffs implementation while the private ADP employment gauge showed a huge surprise to the downside for May’s payrolls. Let us remind ourselves once again that this would mean on-going tariffs scuffle with two of the top three trading partners for the US. Meanwhile, while the correlation between the ADP figure and Friday’s NFP may be a little sketchy here, any likewise disappointments may fuel the Fed to shift interest rates lower given their mandates to look after employment and prices for the economy.

Looking at prices, the rebound for the S&P 500 index may be to some extent technical seeing the surge back above both the 200 and the 100-day moving averages. Given the opposing forces of worries of recession and expected Fed support in the market at present, look to the index to remain relatively rangebound in the coming period. Immediate support back at the 2800 level while resistance may come in near the 50DMA level around 2863.

Source: US Census Bureau

For the US dollar index, likewise a rangebound trajectory may be the case for the near-term. Prices found support above the 200DMA and the longer term uptrend following the double-top formation which saw prices pop a little. Look to how Friday’s US employment data will play out that could be the key here.

Source: IG Charts

Asia open

Worries of the impact from tariffs on Mexico imports would be one to reckon with going into the Thursday trading session for markets including the Asia region. US futures had slipped into red this morning, though some relief from expectations of Fed support can be seen curbing the downside for Asia markets. Look to the playing out of these forces in the day with moderate movements likely, while at the same time await the monetary policy decision in the day from the likes of the RBI and ECB.

Yesterday: S&P 500 +0.82%; DJIA +0.82%; DAX +0.0.8%; FTSE +0.08%