Market Recap

The US equity markets were met with an intensified sell-off towards the latter half of the trading session, reflecting some paring back in risk exposure to position for any upside surprise in US inflation later today. Overnight, the continued surge in US Treasury yields may indicate expectations of a more aggressive rate hike path towards the fourth quarter of the year, as seen from the Fed funds futures. The US 10-year yields are at 3.05%, with rising yields translating to downward pressure for equities, with rate-sensitive Nasdaq (-2.75%) facing a greater extent of sell-off.

Adding to the hawkish expectations is some guidance from the European Central Bank (ECB), which announced a largely-expected 25 basis-point increase for July but stays open to a larger 50 basis-point hike in September. Net asset purchases will end as of 1 July 2022. Any attempt to push back against further rate hikes beyond September was also not seen in the press conference, with the central bank’s determination to curb inflation reinforcing the hawkish surprise from the Reserve Bank of Australia (RBA) earlier this week. With global central banks leaning towards the aggressive end in tightening expectations, that has not provided much of a relief that we may expect any scaling back of policy tightening from the Fed next week.

All eyes will be on the US consumer price index (CPI) data release later, which provides the last glimpse of consumer pricing pressures before the Fed meeting next week. Current expectations are pointing to headline inflation remaining unchanged at 8.3% year-on-year increase, which runs the risk of any slight outperformance potentially dampening optimism of peaking inflation. The overnight sell-off does not seem to bode well for equity bulls, with major US indices such as the Dow Jones Industrial Average (DJIA) seeking to form a new lower high and reinforcing the downward trend. This comes after failing to sustain above a key 38.2% Fibonacci retracement level and leaving the 32,000 level on watch next.

Asia Open

Asian stocks look set for a negative open, with Nikkei -1.28%, ASX -0.78% and KOSPI -1.42% at the time of writing. The risk-off mood in Wall Street on market positioning for any upside surprise in US inflation data may have a knock-on impact on risk sentiments in the Asia’s session as well. Just as there has been recent optimism surrounding Chinese shares, sentiments were also dampened by the reimposition of some virus restrictions in Shanghai for mass-testing over the weekend, along with Chinese regulator denying an earlier report on an attempt to revive the IPO for Ant Group. The Nasdaq Golden Dragon China Index was down by 6.8%, giving back almost half of its gains over the past week. It seems that markets are still uncomfortable with the on-and-off virus restriction measures with China’s zero-Covid policy, with little signs of market participants having adjusted their expectations around intermittent outbreaks as yet.

A look at the China A50 index saw a bearish rejection off the upper trendline of an ascending channel pattern yesterday, which coincides with a key psychological 14,000 level. The near-term higher highs and higher lows since mid-May this year may still keep the near-term upward trend for the index intact. However, it means that the 13,500 level may have to hold up ahead, where a horizontal support came in line with the lower channel trendline. Fundamentally, a catalyst to bring back some relief may be if virus restrictions prove to be short-lived, and we may be able to seek more clarity over the coming days.

On the watchlist: US dollar at three-week high ahead of CPI data release

The lead-up towards the key US CPI release has seen the US dollar index pushing to its three-week high overnight. This comes on the back of a continued broad-based jump in US Treasury yields, reflecting more aggressive rate hike bets and some dampened confidence that the inflation data may show significant signs of easing. On the four-hour chart, the US dollar index seems to be trading in a near-term upward trend, with a series of higher lows over the past week and pushing to a new higher high overnight. That may leave the 103.80 level on watch next as resistance to overcome, with greater clarity on any easing in US pricing pressures to be revealed later today.

Thursday: DJIA -1.94%; S&P 500 -2.38%; Nasdaq -2.75%, DAX -1.71%, FTSE -1.54%