Relief rally for S&P 500 took a pause. What can we watch out for today?

Market Recap

Being back online after its holiday break, the relief rally in Wall Street took a pause (DJIA -0.67%; S&P 500 -0.63%; Nasdaq -0.41%) as the inflation narrative seems to dominate investors’ sentiments once more. Coming after recent plans from Europe to ban Russia oil imports, Russia has cut off gas supplies to more European buyers (Netherlands, Denmark and partly Germany) by failing to meet its payment demand in rubles. Overnight, oil prices took a breather after hitting resistance at the US$120 per barrel mark, as some discussions among Organization of the Petroleum Exporting Countries (OPEC) members to exempt Russia from its oil-producing targets may open up the possibility of increased supplies from other major oil producers. That said, it seems that the demand-supply imbalance will be here to stay, with recent moves from EU and China’s economic reopening all likely to point towards energy costs staying higher for longer.

Inflation data from Eurozone saw a surge above expectations in May, with its headline coming in at 8.1%, above the expected 7.7%. Its core inflation also came in above expectations at 3.8% versus 3.5% consensus. The data will seem to translate into greater pressure for the European Central Bank (ECB) to tighten by a larger 50 basis-point hike in the July’s meeting. As this has not been fully priced into market expectations, market participants may be looking towards the inflation data for June to cement expectations of a more aggressive pace of rate hikes ahead.

Overnight, the meeting between Fed Chair Jerome Powell and President Joe Biden saw no additional moves to curb inflation, with the US president emphasising on the Fed’s independence. This seems to mean no intervention from the government for now, while further aggressive monetary tightening remains the option to address pricing pressures. While US Treasury yields were lifted higher with the US 10-year at 2.87%, it has been trading on a lower high since its peak in May. This will leave any formation of another lower high on watch ahead, which may reinforce the downward trend and potentially some relief for the recent equities’ rally.

On another note, the Russell 2000 seems to be retesting its resistance at the 1,900 level, where a previous support-turned-resistance comes in line with a key 23.6% Fibonacci retracement level. One may watch for any potential break above the resistance line, which may pave the way to retest the 2,000 level next.

Asia Open

Asian stocks look set for a muted open, with Nikkei +0.40%, ASX +0.27%, NZX -0.27% at the time of writing. Markets in South Korea and Indonesia will be closed for holiday today. Overall sentiments in the region may remain mixed with the downbeat mood in Wall Street but some positive moves in US equity futures and Tuesday’s lacklustre performance in the region may aid to limit losses into today’s session. Some optimism may continue to linger around China’s shift towards normalcy with easing virus restrictions, with the Nasdaq Golden Dragon China Index gaining for the fourth straight session (+3.7%) overnight. This also marks its first monthly gain in seven months, with the chart revealing a bullish hammer candlestick and increasing the chances of a near-term rebound.

Having broken above a downward trendline last week, the Hang Seng Index seems to be trading within a near-term upward trend, having formed a new higher high yesterday. Further upside may bring a retest of the 22,400 level next, where a previous support level will now serve as resistance to overcome.

The economic calendar ahead will bring focus to Australia’s Q1 gross domestic product (GDP) reading and China’s Caixin manufacturing Purchasing Managers' Index (PMI). Market participants may have a sense of China’s economic conditions with the release of its official PMI figures yesterday, which saw the recovery in both the manufacturing and services sector pulling ahead of expectations although still in contractionary territory. The NBS manufacturing PMI came in at 49.6 versus 49.0 consensus, while the services PMI came in at 47.8 versus 45.5 expected. Further reopening and lower virus cases ahead may bring optimism that the current phase of economic fallout may be coming to an end, with one to watch on the pace of recovery ahead.

On the watchlist: AUD/USD retesting key upward trendline ahead of Q1 GDP data

The AUD/USD has been trading within a near-term upward trend with a series of higher highs and higher lows since mid-May this year. Ahead of the release of Australia’s Q1 GDP, the currency pair is back to retest a key upward trendline on the four-hour chart, which has been providing support on at least five occasions. While further weakness in the US dollar may play a significant role in driving upside for the AUD/USD, a better-than-expected Q1 GDP data will also be looked upon to provide further tailwind. Current expectations are for a 2.9% growth in Q1 GDP year-on-year and a 0.5% increase from the previous quarter. Should the trendline hold, the pair may move to retest the next resistance at the 0.727 level.

Tuesday: DJIA -0.67%; S&P 500 -0.63%; Nasdaq -0.41%, DAX -1.29%, FTSE 100 +0.10%