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Federal Reserve (Fed) Chair Jerome Powell took the stage yesterday with a series of hawkish comments and while the Fed funds futures did not see much of a change in terms of rate expectations, US equities seem to be taking his words more seriously (DJIA -0.30%; S&P 500 -0.52%; Nasdaq -1.21%).
The Fed Chair maintained his stance that the inflation fight ‘has a long way to go’ and that most central bank officials expect rates to rise further, but nevertheless, a significant degree of data-dependence is still in place. That injects less commitment and more wait-and-see in the central bank’s guidance, with the Fed Chair even labelling further hikes (50 basis-point) as ‘a pretty good guess’.
With that, the US dollar failed to move higher overnight (-0.45%) as Treasury yields pared initial gains to close largely flat to slightly higher. Gold prices managed to find some dip-buying, although the formation of a new lower low on the daily chart still points towards some exhaustion. With tight labour market conditions continuing to be highlighted by the Fed Chair as a justification for further hawkishness, much focus will be on the US jobless claims today.
Following a close to 10% surge since the start of the month, a minor head-and-shoulder formation seems to be in place as the index failed to overcome the 1,900 level of resistance. It could still be a consolidation phase for another leg higher, but for now, the bearish crossover on Moving Average Convergence/Divergence (MACD) points to some near-term exhaustion. Any breakdown of the neckline below the 1,850 level could potentially pave the way to the 1,810 level next, where a confluence of support will be on watch to underpin a higher low.
Source: IG charts
Asian stocks look set for a mixed open, with Nikkei -0.04%, ASX -0.80% and KOSPI +0.36% at the time of writing. Despite the general correlation with the US, the Nikkei has showed some resilience this morning despite the downbeat handover from Wall Street. On the other hand, the ASX 200 seems on track for its second straight day of losses, having unwound close to half of its last two weeks’ gains.
Markets in Hong Kong and mainland China are closed today for the Dragon Boat Festival holiday, so that offers some break for Chinese equities from the renewed tensions in the US-China relationship. China has taken offence with the US President’s remark of President Xi as a ‘dictator’, pushing back against the idea that US-China relationship could be warming with Secretary of State Antony Blinken’s visit.
The day ahead will bring focus to interest rate decision from Philippines and Indonesia, with expectations for both central banks to keep rates on hold. The action could be on the Bank of England (BoE) rate decision instead, which is widely expected to push on with further tightening.
For the Straits Times Index, it continues to trade within a symmetrical triangle pattern, which denotes some market indecision. With the index heading closer to the triangle apex, one to watch will be a potential breakout on either sides to denote buyers or sellers gaining greater control. Any breakdown of the lower triangle trendline could leave the March 2023 bottom on watch at the 3,100 level.
Source: IG charts
On the watchlist: GBP/USD on hold ahead of BoE meeting
Another round of upside surprises in UK May inflation has not provided the BoE any slack ahead of its meeting today, with the central bank likely to retain its hawkish tone that the tightening cycle is far from over. Initial reaction for the GBP/USD to the inflation data was mixed however, as much hawkishness has previously been priced while another 150 bp worth of tightening will come with higher trade-off for growth conditions and makes a UK recession more likely than not.
With a 25 bp hike being a done deal at the upcoming meeting, along with expectations for a terminal rate at 6%, the pair seems to be largely on hold for further validation from the central bank. The higher highs and higher lows since September last year continue to put an upward trend in place, with a series of support lines (200-day MA, downward trendline support, Ichimoku) on watch to provide a higher low in the event of a retracement. Any upside may leave resistance at the 1.300 level.
Source: IG charts