Market Recap

US equity markets shrugged off initial weakness from a US second-quarter (Q2) gross domestic product (GDP) contraction, continuing to push higher on hopes of a less-restrictive Federal Reserve (Fed) ahead. With the current Fed Funds rates hovering close to ‘neutral rate’ at 2.25% to 2.50%, hopes are that further move into restrictive territory will be more measured, especially with the Fed’s shifting stance this week to be more data-dependent. The technical recession was not declared official, considering that the US labour market remains healthy, but tighter conditions ahead suggest that such risks remain prominent. Coming after an overall 125 basis-points (bp) hike from the Fed in Q2, another 125 bp increase is priced for quarter three (Q3), suggesting downside risks for economic indicators ahead. From the GDP data, consumer spending in the Q2 increased 1%, while decline in inventories and fixed investment largely drove the contraction. The inventories segment may be perceived to be more inconsistent, leading to some shrugging-off, but non-residential fixed investment and consumer spending will continue to be on close watch ahead.

Markets are also finding some relief that corporate earnings remain resilient. 52% of S&P 500 companies have released their earnings thus far, with 76% outperforming earnings expectations, which is in line with previous seasons. Apple and Amazon’s earnings results release after-market marks another display of resilience, with top-line beat while shrugging off softer economic conditions with rosy guidance. This may seem to provide the go-ahead for improving risk appetite, with Apple and Amazon’s share price up 4% and 13% after-market respectively. With the Fed being data-dependent, key economic data on watch today includes the release of the US Personal Consumption Expenditures (PCE) price index and US consumer confidence data.

The US 10-year Treasury yields, as seen from the TNX, have broken below a head-and-shoulder pattern with the pricing of a more measured approach from the Fed and lingering growth concerns. This has drawn traction for the non-yielding gold, which came in at its three-week high overnight. A retest of key resistance at US$1,767 level could lie ahead, which marks the confluence of an upper channel resistance and a key 76.4% Fibonacci level.

Asia Open

Asian stocks look set for a positive open, with Nikkei +0.20%, ASX +0.91% and KOSPI +0.76% at the time of writing. The improved risk environment, with the VIX at its three-month low, could continue to play out in the Asia session today. The talk between US and China remains on watch for any signs of tension escalation over Taiwan, but thus far the warnings still seems measured. On the economic data front, easing China’s restrictions also drove a stronger-than-expected June output for Japan, with China’s reopening potentially having a positive knock-on impact across the region as well into the second half of the year.

Closer to home, UOB has released its earnings this morning, with a 11% jump in earnings for Q2. Riding on the interest rate upcycle, a 7 bp improvement in net interest margin has lifted its net interest income by 18% year-on-year (YoY). Overall loan growth also remains resilient with a 1% growth from the previous quarter with economic reopening, but some downtick in Singapore’s bank lending data towards the latter half of Q2 could be early signs of moderating loan figures ahead so further room for reversion in net interest margins ahead may have to do the heavy-lifting for profitability. Nevertheless, despite lingering growth concerns, loan loss provisions remain stable, as the bank has been prudent in releasing its loss allowances build-up from Covid-19 previously. UOB has maintained their semi-annual dividend of 60 cents per share, translating to a dividend yield of 4.3% at current price. The day ahead will leave Singapore bank lending data for June in focus, along with Singapore’s preliminary unemployment rate for Q2.

The STI continues to push to its one-month high, with the 3,270 level as the next key hurdle to overcome. The new higher high continues to provide an overall upward bias, but with the relative strength index (RSI) hitting oversold technical levels, any retracement will leave the formation of a new higher low on watch for a continuation of the near-term upward trend. Support could be at the 3,200 level, where a key 23.6% Fibonacci level stands in place.

On the watchlist: USD/JPY moving to retest key bottom channel support on retracing US yields

With the decline in US economy for a second straight quarter, pricing for growth risks has led to some traction towards the relative safety of bonds and a further downtick in US 10-year Treasury yields. With the US 10-year yields falling below the neckline of a head-and-shoulder pattern, further downside could be likely, which leaves a shrinking yield differential as key headwind for the USD/JPY. The currency pair has been trading on an upward channel since March this year, with recent move inching closer to the lower channel trendline. Any potential break of the trendline support could leave the 131.00 level on watch next.

Thursday: DJIA +1.03%; S&P 500 +1.21%; Nasdaq +1.08%, DAX +0.88%, FTSE -0.04%