Second consecutive day of gains in Wall Street: S&P 500, GBP/USD, Hang Seng Index, EUR/USD

Market Recap

Major US indices continue to ride higher for the second consecutive day, with the ongoing Fed blackout period providing risk sentiments with some breather from Fed officials’ hawkish comments, while all eyes are on the upcoming big tech results to showcase some resilience in corporate earnings. Close to 50% of S&P 500’s overall market cap will be reporting their earnings this week. Overnight, the US Treasury yields headed slightly higher, but that was largely shrugged off as longer-term interest rate expectations were revised down recently on report that the central bank might shift to smaller interest-rate rises after its November meeting. The blackout period did not provide Fed members any chance to clarify that. Instead, the stance was supported overnight as economic data revealed a deeper-than-expected contraction in US economic conditions. Both US manufacturing and services flash Purchasing Managers Index (PMI) readings underperformed market consensus and seem in tune with the Fed’s goal of moderating demand.

The S&P 500 is headed to retest a zone of resistance at 3,800, where a confluence of key Fibonacci retracement levels had previously capped the index’s upside in early October. Recent bullish divergence on technical indicators continues to provide an upward bias in momentum for now, with much to depend on the upcoming big tech earnings this week. Overcoming this level could leave the key psychological 4,000 level in sight next.

Developments in the UK also saw risk sentiments improve, with Rishi Sunak set to become Britain’s next Prime Minister and removed a key overhang on country leadership. The broad-based fall in UK government bond yields and uplift in the FTSE 100 index marked a reflection of some restoring market confidence, with his stance to align government policies with the central bank to tame inflation while turning to some spending cuts to manage budget shortfall. For the GBP/USD, it continues to hover just below its previous peaks at the 1.145 level, where previous optimism was capped despite improving market stability. Much will depend on whether follow-up plans from the new UK Prime Minister will provide further reassurances to sentiments, where an upward break above the 1.145 level could open the door to the 1.178 level next. That said, longer-term moves will still likely revolve around Fed’s policies, with the US dollar’s strength as a major headwind for the pair and the overall downward trend may still seem unlikely to be reversed in the absence of a policy shift from the Fed.

Asia Open

Asian stocks look set for a positive open, with Nikkei +0.91%, ASX +0.63% and KOSPI +0.69% at the time of writing. While the global risk environment seems to be turning for the better, Chinese equities seem to be headed for the opposite, with major China indices down by 2-3% yesterday. The bearish sentiments were taken on by the Nasdaq Golden Dragon China index overnight, which fell more than 14%. The Hang Seng Index was weighed down by a hefty 6.4% decline as well, due to its significant exposure to the Chinese tech space.

Coming after the conclusion of China’s National Congress, it seems that investors are worried that President Xi will now have a greater say in policy direction, with the new top leadership team surrounded by his loyalists. This suggests that we may be expecting more of a status-quo in economic policies, which means further anchoring down of China’s zero-Covid stance and further steps towards wealth and income distribution. The emphasis on the ‘common prosperity’ agenda leaves big corporate in the crosshair, leading to further shunning of Chinese big tech companies on concerns that further follow-up in regulatory reforms could be on the line.

The 6% plunge in Hang Seng Index yesterday seems to leave its 2008-2009 bottom in sight. A look at the weekly chart for the index suggests that when the RSI indicator is trending in oversold levels historically, a bullish divergence on the RSI tends to precede a longer-term recovery. Therefore, the formation of a higher low on the weekly RSI could potentially be a sign to watch to denote easing selling momentum. Until then, it seems that the index will continue to face continued downward pressure, as investors seem to be leaning more towards the US markets.

On the watchlist: EUR/USD inching towards channel trendline resistance ahead of ECB meeting

The EUR/USD has been inching higher on the improved risk environment lately, forming a series of near-term higher lows over the past month. This week will leave the ECB meeting in focus. An out-sized 75 basis-point hike is likely a done deal and further catch-up may be guided to play out over the coming months. That said, previous meetings with rate hikes from the ECB were met with merely an upward knee-jerk reaction in the EUR/USD, with the pair resuming its downward trend thereafter. This may potentially play out this time round as well, as the ECB is deemed to be largely playing catch-up to the Fed and economic conditions in the Eurozone remain more susceptible to recession risks. The parity level will be a key resistance to overcome ahead, which coincides with an upper trendline of a descending channel pattern, and failure to overcome the resistance will likely point to a resumption of its downward trend ahead.

Monday: DJIA +1.34%; S&P 500 +1.19%; Nasdaq +0.86%, DAX +1.58%, FTSE +0.64%