A confluence of factors has downplayed the risks of recession overnight, pulling US equity indices higher for the second straight session.
A confluence of factors has downplayed the risks of recession overnight, pulling US equity indices higher (DJIA +1.12%; S&P 500 +1.50%; Nasdaq +2.28%) for the second straight session. Coming after recent market jitters around recession, some reassurances to tame such fears are being welcomed. For one, commentaries from Fed officials, Christopher Waller and James Bullard, maintained that the economy could deliver a soft land despite reaffirming a 75 basis-point (bp) hike in the upcoming July Federal Open Market Committee (FOMC) meeting. This comes along with China’s plan to bring forward US$220 billion worth of bond sales to provide an infrastructure stimulus, while several corporate earnings outperformance overnight also provided a resilient take on economic conditions. Optimism around Samsung Electronics’ 21% jump in revenue has provided an uplift for US semiconductor stocks, while a 3% recovery in oil prices drove outperformance in the energy sector.
Ahead, some wait-and-see leading up to the key US non-farm job report could play out, with current expectations pointing to job gains of 268,000, its lowest since November last year. The recent contraction in employment sub-index displayed in both the US manufacturing and services purchasing managers index (PMI) may carry an upcoming underperformance and it may be up to the markets to see if an underwhelming figure could translate into higher recession risks or if it can lead to expectations for some paring back of rate hike bets after July. In my view, the absence of any significant outperformance in job gains and uptick in unemployment rate could be catalysts for near-term relief. Any moderation in wage gains will also be on watch, with average earnings expected to tick lower to 5% year-on-year from 5.2% in May.
For the Russell 2000 index, recent higher lows seem to carry an attempt for a near-term recovery. Resistance to watch ahead could be at the 1,834 level, where a near-term upper channel trendline seems to coincide with a key 23.6% Fibonacci retracement. Further move above this level will then leave the 1,954 level in focus next.
Asian stocks look set for a positive open, with Nikkei +1.03%, ASX +0.88% and KOSPI +1.38% at the time of writing. Sentiments in Asia could have an uplift from the positive momentum in Wall Street, but still carrying some slight caution ahead of the US jobs report with some wait-and-see revealed in the muted moves for US equity futures into this morning. US-listed Chinese stocks came in higher overnight as well, with the Nasdaq Golden Dragon China Index delivering a 4% gain. Concerns of climbing virus cases in China seem to be overridden by China’s plan to lift the economy with a US$224 billion stimulus infrastructure package for now, along with the improved risk sentiments.
For the Hong Kong HS50, the formation of higher lows and a bounce off a near-term upward trendline may suggest further attempt to push higher. A key resistance on watch ahead will be at the 22,400, where the horizontal resistance has held down the index on at least three occasions over the past three months. Any break above this level could confirm a greater reversal in sentiments to the upside, potentially bringing a retest of the 24,600 level over the longer term.
On the watchlist: Copper prices attempting to recover from oversold technical conditions
Copper prices have not been spared from the recent rout in commodities as markets price for potential demand destruction from recession risks, with the metal prices reaching a 20-month low this week. That said, some near-term relief could be on watch, as prices attempt to recover from its oversold technical conditions after a heavy 25% sell-off since early-June. This comes with the formation of a bullish hammer candlestick at a 50% Fibonacci retracement level on Wednesday, accompanied with a reversion of the RSI from oversold into neutral territory. Fundamentally, China’s plan for a US$220 billion stimulus package also aided to improve sentiments around the demand outlook. Near-term resistance may leave the price level of US$8,400 per ton in focus, considering that the overall trend remains downward bias and that level may be on watch for any formation of a new lower high.
Thursday: DJIA +1.12%; S&P 500 +1.50%; Nasdaq +2.28%, DAX +1.97%, FTSE +1.14%