US rebound may lift Asian markets

There were mixed signals from the overnight market performance, EU stocks closed lower while US markets rallied hard. However, performance from the Street would be more relevant to Asia.

Source: Bloomberg

S&P 500 had a wobbly first half, before buyers overwhelmed sellers to see a 3.9% gain on Wednesday. Strong showing was also seen in the Dow and the Nasdaq. Trading volume was considerably higher, and I think that investors decided  it was time to accumulate some cheaper buys.

Technically, the indicators are starting to point up. 14-day RSI broke 30 from under while daily MACD  steeply oversold. The last time the daily MACD line was so deep in the negative was back in August 2011. 

The compelling technical signals may also be complemented by a pair of news.Firstly, comments from New York Fed president William Dudley (FOMC voter) suggested that the September rate move is not going to happen. He said, ‘From my perspective, at this moment, the decision to begin the normalisation process at the September FOMC meeting seems less compelling to me than it was a few weeks ago.’

He was careful to stick to the data-dependent stance, saying that he still hopes to see rate normalisation this year but much depends on the coming data before any decision is made. Apart from the potential delay in Fed tightening, his remarks that short-term stock market swings do not have significant implications for the US economy, may also have helped sentiments. He stressed that the recent stock turmoil was dissimilar to the 2008 global financial crisis.

Secondly, solid durable goods data helped to reiterate the improving outlook for the US economy. The headline data saw an upside surprise, gaining 2%, beating expectation of a decline of -0.4%. Orders for capital goods, excluding non-military equipment, for July rose the most in over a year at 2.2%. The gradual improvement in the economy as well as steady employment have fostered more confidence in the US outlook, and loosened businesses’ pulse strings for more corporate spending.

Interestingly, the rebound in US stocks led to an appreciation in USD, despite more signs that the Fed is not going to adjust interest rate in September. The dollar index moved back above 95.0, which dampened the euro and yen. The VIX index slipped lower to 30.32, indicating lower volatility and fear.

Looking ahead to Asia, the upswing in US equities would bring more cheer to regional markets. Australia and Japan have already started on a positive footing, rallying over 1% this morning. It would be interesting to watch whether China markets would close higher, after five days of losses. Asian currencies are expected to come under pressure on renewed dollar strength. USD/SGD is edging higher after falling below 1.40 on Tuesday while USD/MYR may also resume its northbound path. USD/CNY is still stable around 6.40.

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