Market Recap

An initial move higher in Wall Street from better-than-expected US ISM manufacturing Purchasing Managers Index (PMI) data eventually clawed back as the data seem to deliver mixed offerings in its details. Pockets of optimism were found in the significant 18.5 percentage point drop in prices paid (60.0 versus 78.5 in June), as US manufacturers faced less pressure on input costs from softening commodities prices. The data may be well-received by the Fed, suggesting that the inflation picture is seeing some improvement and translates to lesser pressure for policy tightening ahead. The employment sub-index also saw an improvement with a lesser contraction from June (49.9 versus 47.3), as ongoing demand and existing short supply continues to underpin the labour market.

On the other hand, a trade-off to policy tightening comes with further moderation in economic activities. Production and order backlogs expanded at a slower pace from June, while new orders fell further into contractionary territory (48.0 versus 49.2). Separate data on construction spending also fell 1.1% month-on-month, lower than the 0.1% expected, as rising mortgage costs continue to cool housing demand. Pricing for lower inflation risks and higher growth risks are reflected in further downticks for US Treasury yields, providing an uplift for gold prices. Gold prices are currently retesting its upper channel trendline resistance, with any upward break on the narrative of Fed’s peak hawkishness on watch.

For the S&P 500, it has surged close to 6% over the past week and with much of the big tech earnings and Federal Open Market Committee (FOMC) meeting now behind us, markets are in need for a new catalyst to sustain the rally. The unproportionate 7% surge in the Volatility Index overnight suggests that some caution is surfacing in the near term as technical indicators trend at near-overbought levels. Any retracement will leave the formation of a higher low on watch as a continuation of the upward trend.

Asia Open

Asian stocks look set for a weak open, with Nikkei 225 -1.02%, ASX -0.35% and KOSPI -0.31% at the time of writing. A looming risk event lies ahead as US House speaker Nancy Pelosi was set to visit Taiwan today, running the risk of a further deterioration in US-China relationship as exchange of words on both sides continue. Along with Covid-19 and delisting risks in China, a mood of caution still seems to linger around Chinese equities for now, with the Nasdaq Golden Dragon China lower by 2% overnight. Alibaba remains in focus with yesterday’s late-night surge in share price, potentially pricing for some downplaying of delisting risks. Its results will be released this Thursday.

The economic calendar will put the Reserve Bank of Australia (RBA) meeting in focus, with expectations pricing for an 84% probability of a 50 basis-point (bp) hike, which is on par with previous rounds of increase. While the recent underperformance for consumer prices has pushed back against bets of a 75 basis-point hike, more half-point hikes seem to be priced ahead as the current cash rate of 1.35% still require some catching-up towards neutral settings of around 2.5%. The AUD/USD has broken above the previous support-turned-resistance level at 0.700, shrugging off China’s recent economic weakness and seemingly pricing for a hawkish RBA. Any resolve to tackle inflation from the central bank will be on close watch to sustain recent upside.

On the watchlist: Brent crude finding resistance at upper channel trendline

Market pricing for growth risks continues to translate to some downward pressure for oil prices overnight, as Brent crude slipped close to 3% lower and threatened to overturn its past three days of gains. A surprise contraction in factory activities suggests a lower-for-longer pace of recovery in China, while various manufacturing PMIs continue to serve as a reminder for moderating demand overnight. On the technical front, Brent crude has been trading on a descending channel pattern since June this year, with yesterday’s retest of the upper channel trendline met with a bearish rejection and failed to sustain above the US$100-mark. The OPEC+ meeting will be on watch next, with focus on the group’s decision on output. A no-change in stance seems to be the likely scenario as some of its members continue to struggle with meeting its production target. Further downside could leave the US$97.00 level on watch next.

Monday: DJIA -0.14%; S&P 500 -0.28%; Nasdaq -0.18%, DAX -0.03%, FTSE -0.13%