US equities soared after Fed Chair Powell took the stage: S&P 500, Nikkei 225, USD/JPY

Market Recap

The US equity markets started off on a muted tone but soared after Federal Reserve (Fed) Chair Jerome Powell took the stage. Despite his guidance that restoring price stability still has a long way to go, markets are seeking comfort from his signal for a coming downshift in rate hikes in December. That drove a less hawkish recalibration of the rate hike expectations, with markets leaning firmly towards a 50 basis-point (bp) hike later this month while terminal rate expectations also saw some inclination towards the 4.75-5% range, lower than the previous 5-5.25% range. The speech seemingly provided markets some clarity that the downshifting is coming earlier than expected, as markets were previously still split in their expectations for December before Fed Chair Jerome Powell’s comments. The US dollar was dragged lower, with the 105.00 level still in key focus where previous dip-buying efforts were seen. US Treasury yields also reacted with a broad-based decline, driving the stellar outperformance in the rate-sensitive Nasdaq overnight.

Economic data did not spur much of a sustained reaction, with the estimates for US quarter three (Q3) gross domestic product (GDP) revised higher to 2.9%. US job openings came in higher-than-expected, but Automatic Data Processing (ADP) private payroll figures underperformed significantly (127,000 versus 200,000 consensus). The combination of both seems to suggest a still-tight labour market but nevertheless, the moderation in job gains points to a positive reaction to policy tightening efforts.

The S&P 500 has reclaimed its 200-day moving average (MA) for the first time since April this year and will be a major victory for the bulls if it can stay above it. Ahead, the index is coming into contact with a downward trendline resistance, along with the upper range of a rising channel. Equity bulls seem to be rejecting the bearish crossover formed on moving average convergence/divergence (MACD). The US core Personal Consumption Expenditures (PCE) price index will be on watch next to provide further support for the downshifting rate-hike stance.

Asia Open

Asian stocks look set for a positive open, with Nikkei +1.47%, ASX +0.95% and KOSPI +1.04% at the time of writing. Chinese equities continue to push higher yesterday on reopening hopes, with the Hang Seng index breaking to a new higher high and reiterates its upward bias. Along with the positive reaction in Wall Street to Fed Chair Jerome Powell’s comments, the Nasdaq Golden Dragon Index closed more than 9% higher, which could set the upcoming trading session up for some positive follow-through. Reopening bets seem to receive some validation overnight, with China’s vice premier softening its tone Covid-19 by saying that efforts to combat the virus are entering a new phase. That seems to hint at some plans being underway for reopening next year. With the 18,600 level of resistance being overcome for the Hang Seng Index, that could seem to place the key psychological 20,000 level on watch.

For the Nikkei 225 index, a retest of its previous highs at the 28,400 level seems to be in place once more after a short-lived retracement. This comes despite a recent bearish crossover formed on MACD, as buyers sought support at its 20-day MA, which they have been holding on to over the past one month. A move above the 28,400 level could leave the 29,300 level on watch over the longer term, where the 76.4% Fibonacci retracement stands in place.

On the watchlist: USD/JPY retesting recent lows on declining yield differentials

Comments from Fed Chair Jerome Powell have dragged US Treasury yields lower overnight, with the USD/JPY (大口） tapping on the declining yields differentials to retest recent lows at the 137.50 level. The impending downshift in rate hikes from the Fed seems to have markets riding on the peak hawkishness narrative, with the softening policy divergence outlook translating to weakness in the pair. A break below the 137.50 level will mark the formation of a new lower low and reiterates its near-term downward bias, potentially leaving the 135.20 level on watch next.

Wednesday: DJIA +2.18%; S&P 500 +3.09%; Nasdaq +4.41%, DAX +0.29%, FTSE +0.81%