Despite some retracement at the start of this week, the equity bulls are not giving up on the relief rally in Wall Street after paring back on initial weakness overnight and forming a new higher low for major US indices.
Despite some retracement at the start of this week, the equity bulls are not giving up on the relief rally in Wall Street after paring back on initial weakness overnight and forming a new higher low for major US indices. Despite some pushback against a September rate pause by Fed Vice Chair Lael Brainard, the downplaying of a rate pause by some officials’ comments since the start of the week may have helped to manage market expectations and avoid a panic reaction to the downside.
The catalyst for improved risk-on sentiments may come from the wide underperformance in US Automatic Data Processing (ADP) payroll figure for May. While the ADP data has not been a good predictor for the non-farm payroll number historically, the wide underperformance in job gains took the spotlight and the hopes that the Fed may take on a more cautious and gradual approach in tightening towards the latter part of the year may lead to some unwinding of hawkish expectations. This may explain the outperformance in rate-sensitive growth sectors overnight, with the US dollar turning in lower while the rally in US Treasury yields took a pause. To recall, the private payroll number increased by just 128,000 in May (way below the 300,000 consensus), marking the lowest gain since the Covid-19 pandemic recovery. The non-farm payroll report release today will be closely watched for confirmation and a similar underperformance may aid to provide an uplift for growth sectors.
On the commodities front, the Organization of the Petroleum Exporting Countries Plus (OPEC+) has agreed to increase the size of its monthly oil supply by 50% for July and August, from the initial 432,000 to 648,000 barrels a day. Nevertheless, the oil market may continue to stay tight, with some of its members already struggling to hit its production targets in recent months, while the additional increased supply may be partially offset by the US and European summer driving demand.
Having broken out of an ascending triangle pattern last week, Brent crude prices are attempting to bounce off the upper flat trendline of the pattern as potential support yesterday. The US$120.00 level will continue to be looked upon as resistance to overcome ahead, with a key 23.6% Fibonacci level weighing on prices this week.
Asian stocks look set for a positive open, with Nikkei +1.09%, ASX +1.00%, KOSPI +0.66% at the time of writing. Markets in China, Hong Kong and Taiwan are closed for holiday today. Overall sentiments may take the cue from Wall Street, with the improved risk-on environment aiding to provide some upside. Overnight, the Nasdaq Golden Dragon China index has surged 4.6% and while trading in Chinese equities may be unavailable today, the strong positive performance may still provide an upbeat backdrop for the region. Amid the largely quiet economic calendar, market participants will be awaiting the key US non-farm payroll report out tonight.
Singapore’s manufacturing purchasing managers index (PMI) released yesterday saw a tick higher to 50.4, turning in a positive surprise compared to expectations of 50.1. That said, softening demand for the electronics manufacturing industry (PMI of 50.5 in May versus 50.7 in April) may be showing up, along with elevated supply costs. One may watch over the coming months if China’s shift towards normalcy may aid to fill the gap for the global demand slowdown. The day ahead will bring focus to the release of Singapore’s retail sales data, where retail sales for April is expected to increase to 10.4% year-on-year, up from the previous 8.7%. Pent-up demand from easing of restrictions may aid to underpin retail sales figures for the coming months, with any signs of resilience for consumer spending on close watch in light of elevated inflationary pressures.
On another note, the ASX has been largely in a longer-term consolidation mode since May last year, but near-term moves seem to be trading within a rising wedge pattern. While a rising wedge in a downward trend is generally looked upon as a continuation pattern, one may potentially watch for a break on either side of the wedge to further drive sentiments.
On the watchlist: EUR/USD back to retest upper channel trendline ahead of NFP report
Recent moves in the EUR/USD seem to be revolving closely around the US dollar, in which the dollar’s attempt to rebound was met with a bearish engulfing overnight. This came after a disappointing ADP job number for May pointed towards the slowest growth since the Covid-19 pandemic recovery, leading to some unwinding of hawkish expectations. The US non-farm payroll release will be looked upon tonight for further confirmation. For the EUR/USD, after retracing slightly from the upper trendline of a descending channel pattern, the currency pair is back to retest the line of resistance once more. With that, one may watch for any break above the 1.077, which may potentially pave the way for further upside to the 1.112 level next.
Thursday: DJIA +1.33%; S&P 500 +1.84%; Nasdaq +2.69%, DAX +1.01%