Improved risk sentiments for S&P 500 after FOMC minutes release

Market Recap

The US equity markets pushed sharply higher towards the second half of the trading session (S&P 500 +0.95%; DJIA +0.60%; Nasdaq +1.51%), coming after the release of Federal Open Market Committee (FOMC) minutes which signalled room for a pause in rate hikes later this year. The Fed minutes show that most US policymakers supported half-point rate increases over the next two FOMC meetings, but that has already been well-anchored into market expectations from previous Fed comments and should not come as a surprise. The pocket of optimism comes from their stance that an ‘expedited’ tightening may leave some flexibility for policy adjustments later this year, though much will depend on whether inflationary pressures taper down significantly over the coming months. Restoring price stability still clearly take precedence over growth, with the central bank highlighting that a ‘restrictive stance of policy’ may be appropriate depending on outlook.

That said, the data-dependent stance from the Fed may be nothing new and has been largely maintained since the pandemic. The upcoming runoff in balance sheet may also take on the role to restrict liquidity to some extent, which may directly relieve some pressure for rate hike increases. Therefore, some caution will still be warranted over the coming months as to how markets may react to the tighter liquidity conditions, with previous events of balance sheet run-off driving periodic episodes of market jitters.

On the corporate earnings front, better-than-expected results from Nordstrom (+14.0%) and Dick’s Sporting Goods (+9.7%) have lifted shares of other retailers overnight, adding on to the improved risk sentiments. Nonetheless, markets will have to digest Nvidia’s earnings released after-market. While outperformance in both its top-line and bottom-line continues to point towards strong semiconductor demand, a weak Q2 guidance translated to a 7% plunge in share price after-market.

A previous bearish RSI divergence has driven a retracement in the US dollar of 3.2% from its recent peak. A retest of the 102.30 level was met with a bearish rejection thus far, with some recovery in risk sentiments weighing on the safe-haven currency as well. Near-term support to watch may be at 100.80 level, where an upward trendline coincides with a horizontal resistance-turned-support.

Asia Open

Asian stocks look set for a positive open, with Nikkei +0.63%, ASX +0.04%, KOSPI +0.85% at the time of writing. Some improved risk sentiments in Wall Street coming after the Fed’s minutes release may aid to provide some relief for Asia markets, with a stronger recovery in tech providing tailwind for the more tech-exposed Nikkei and KOSPI. Market participants in the region will also have to juggle between the positive moves in US-listed Chinese stocks overnight and the lacklustre outlook from Nvidia after-market. The US chipmaker guided that China’s virus lockdowns and geopolitical tensions have disrupted its production, which joined the ranks of many companies in highlighting the restrictive impact from such risks.

Some wait-and-see may also play out ahead of key Chinese tech earnings from Alibaba and Baidu tonight, which are likely to echo recent Tencent’s results on slower sales growth. Management may also remain cautious on its outlook amid the ongoing regulatory crackdown and weak economic conditions. Therefore, it will be a question of whether its guidance can deliver the impression that the worst is over for these risk factors, in order to lift market sentiments for the overall tech sector.

The latest interest rate decision from the Bank of Korea brings about a further hike of 25 basis-point to 1.75%, which is largely expected. Its CPI forecast was raised to 4.5% from 3.1% for 2022, while growth forecast was cut to 2.7% from the previous 3% projection. The four-hour chart of the USD/KRW reflects an ongoing descending channel pattern, with recent retest of its upper trendline met with a bearish pin bar candlestick. Further retracement may leave the lower trendline on watch as support at the 1,250 level.

On the watchlist: Brent crude prices trading within an ascending triangle pattern

Oil prices have been juggling a series of opposing catalysts, as the ongoing tightening of global crude supplies was pitted against virus restrictions in China. Data from EIA yesterday showed US refinery activity surging to its highest level since 2019, while US crude oil inventory remains at near-2019 low. On the technical front, Brent crude prices seem to be trading within an ascending triangle pattern since April this year, with one to watch for any potential break above the flat upper trendline at the US$113.20 level to suggest further upside. That may then leave the US$120.00 level on watch next, where a key Fibonacci 23.6% retracement level has weighed on prices in late-March this year.

Wednesday: S&P 500 +0.95%; DJIA +0.60%; Nasdaq +1.51%, DAX +0.63%, FTSE 100 +0.51%