Some wait-and-see in place for further cues from Wall Street

Market Recap

While the US equity markets were closed on Monday, European markets posted modest gains with an attempt to follow through with the positive momentum last week amid the improved risk-on environment. However, some caution may have surfaced following Germany’s recent inflation print reflecting the ongoing inflationary pressures from energy and food prices. Germany’s headline inflation for May delivered a 7.9% year-on-year (YoY) increase, higher than the 7.6% increase expected. The harmonised inflation rate stands at 8.7% YoY increase, far ahead of the 8% forecast. With plans from the European Central Bank (ECB) to potentially raise interest rates in July, the data may seem to translate into greater pressure for a 50 basis-point hike, rather than the 25 basis-point consensus. The release of the Eurozone inflation data later today will be looked upon for confirmation.

To add to the story of inflation, European Union (EU) leaders are currently pursuing a compromise plan for a partial ban on Russian oil. The sanctions will start with seaborne oil, while pipeline crude is temporarily put on hold to address Hungary’s concerns, with the initial move guided to cover more than two-thirds of oil imports from Russia. The ongoing supply-demand imbalance is likely to reinforce the tightness in the oil market and coupled with China’s plans for economic reopening, oil prices continue to see some upside overnight. On the technical front, having broken out of an ascending triangle pattern last week, Brent Crude prices may see a retest of the US$120 level next. This level has previously served as resistance on two occasions in March this year.

Comments from Fed Governor Christopher Waller pointed towards a series of 50 basis-point hikes until inflation eases back towards the 2% Fed’s target. Rate hike expectations towards the latter half of the year saw some upward revision from last week. With the resumption of trading, US Treasury yields saw a broad-based jump, which may seem to translate into some downward pressure for equities futures this morning, particularly for the rate-sensitive Nasdaq.

Asia Open

Asian stocks look set for a muted open, with Nikkei +0.24%, ASX -0.17%, KOSPI -0.05% at the time of writing. Without any leads from Wall Street overnight, sentiments may carry some wait-and-see for further cues, while some weakness in US futures were observed this morning.

The day ahead will bring focus to China’s manufacturing and services Purchasing Managers’ Index (PMI) figures, which is expected to see some lift-off from its April’s low but remained in contractionary territory. The manufacturing print is projected to come in at 48.9, up from the previous 47.4, while the non-manufacturing PMI is expected to come in at 45.0 versus 41.9 in April. While some recovery in sentiments may be reflected, the lacklustre figures may still point to the ongoing dent in economic conditions, which reinforce the calls for economic measures to stabilise growth. With recent fiscal and monetary efforts from authorities, along with the shift towards normalcy with easing virus restrictions, further recovery in economic conditions may be expected to take place over the coming months but the extent of recovery will be looked upon as a gauge of policy success.

On another note, the latest SGX fund flow data saw net institutional outflows of S$153mn for the STI last week, with further distribution seen in the financial (-S$126mn) and REITs (-S$86mn) sectors. The STI has been largely trading within a consolidation pattern over the past three weeks, reflecting some market indecision. One may watch for any break above the consolidation zone at the 3,250 level to suggest a longer-term shift in sentiments to the upside. For any downside, an upward trendline has remained in place to support the index on at least seven occasions, leaving the 3,175 level in focus.

On the watchlist: EUR/USD retesting key channel trendline resistance

The EUR/USD has been trading within a descending channel pattern since February this year, with recent moves retesting the upper trendline of the channel as resistance. Further weakness in the US dollar and rising expectations of a rate hike from the ECB in July will be looked upon as catalysts for an upward break. This will leave the Eurozone inflation data in focus today, where headline inflation is expected to trend higher to 7.7% in May, up from the previous 7.4%. A firmer inflation data may reinforce the recent hawkish comments from ECB policymakers, potentially providing tailwind for the currency pair. A break of the upper channel resistance at 1.077 may bring further upside to the 1.112 level next, while failure to do so may see the 1.052 level as potential support.

Monday: DAX +0.79%, FTSE 100 +0.19%