Subdued session in Wall Street but action lies ahead: US dollar, Hang Seng Index, Brent crude

Market Recap

A quiet economic calendar to start the week translated to a subdued session in Wall Street overnight, as sentiments await further cues from upcoming earnings releases to guide market moves. Notable data consists of a surprise improvement in the New York Federal Reserve (Fed) manufacturing index (10.8 versus -18 forecast) but a still-cautious outlook from manufacturers suggests that it may still take much more to push back against the recession narrative.

Nevertheless, the US dollar found a move higher overnight (+0.4%) with a bounce off its February 2023 low. An ongoing series of lower highs and lower lows since topping out in March still put an overall downward trend in place, while rate expectations remain firmly anchored for an impending Fed rate pause after May. But for now, a stronger US dollar seems to be the perfect excuse for some unwinding in gold (-0.5%) and silver prices (-1.5%) from previous overbought conditions.

Oil prices were weighed 2% lower as well, dragging the energy sector (-1.3%) down with it. Sector performance revealed some resilience in financials, as impact of previous banking fallout has been more uneven compared to being a widespread risk. The 2.7% in Alphabet’s share price has been eye-catching as well, as investors perceive the incorporation of Microsoft Bing search tool in Samsung phones to be a potential risk for its dominant market share.

Having traded within a wedge pattern on its four-hour chart, the 102.11 level will be a key challenge to the US dollar’s upside in the near term, where an upper trendline resistance stands. Failure to move above the trendline may still leave its ongoing lower highs in place and reiterates an overall downward bias. Commodities Futures Trading Commission (CFTC) data revealed that the dollar's aggregate positioning against G10 currencies has remained in net-short territory since November 2022, reflecting an ongoing bearish positioning from large speculators.

Asia Open

Asian stocks look set for a mixed open, with Nikkei +0.16%, ASX -0.32% and KOSPI -0.48% at the time of writing. While the subdued handover from Wall Street did not provide much to digest, Chinese equities have taken on a clearer direction, with the Nasdaq Golden China Index surging 3.2% higher.

This follows after a smaller liquidity injection from the People’s Bank of China (PBOC) and an unchanged medium-term lending facility rate support hopes that China’s economic recovery may be on track. Validation will be sought from the series of upcoming China’s data later today, with expectations for quarter one (Q1) gross domestic product (GDP) to pick up to 4% from previous 2.9%. Further recovery is also expected on all front (retail sales +7.4%, industrial production +4%, fixed asset investment +5.7%) from the previous year.

The Hang Seng Index is attempting to retest the 20,900 level of resistance once more, where a Fibonacci confluence zone stands. Recent validation of support at its 200-day moving average (MA) still keeps its overall upward trend in place. Multiple retests of resistance may raise the chances of a breakout. Any potential break above the 20,900 level may allow the index to set its sight on its 2023 high at the 22,900 level next.

On the watchlist: Brent crude prices pulled back from technical resistance

The slight bounce in the US dollar to start the week has not been positive news for Brent crude prices with a 2% overnight decline, following the retest of a key technical resistance at the US$86.90 level. This brings oil prices back to its previous consolidation zone, but with an upward trendline in place as near-term support. Any break below the consolidation base at the US$83.50 level may leave a potential gap-covering process in place and places the US$80.00 level in sight.

Economic data out of China will be key this week. The Organization of the Petroleum Exporting Countries (OPEC) has recently raised its forecast for China’s oil demand and the upcoming data will be on watch to provide the much-needed validation for their views. A stronger-than-expected recovery may set a floor for oil prices, with China’s recovery story still far from done while supplies conditions remain tight.

Monday: DJIA +0.30%; S&P 500 +0.33%; Nasdaq +0.28%, DAX -0.11%, FTSE +0.10%