Market Recap

Major US indices reversed course to kickstart the new trading week as an 8% jump in the VIX reflected heightened fears in reaction to recent protests in China, which weighed on China-exposed companies such as Apple (-2.6%). Preferences for a defensive positioning overnight were reflected in the lean towards defensive sectors, while the safe-haven US dollar and the Japanese yen saw renewed strength.

The economic calendar was also lined up with speeches from Federal Reserve (Fed) officials, which provided the last few clues of Fed policies before we head into the Fed blackout period. Pushback against a ‘dovish pivot’ in rates seems to be the consensus, notably with New York Fed President John Williams only seeing a rate cut in 2024. This seems to be a more hawkish guidance compared to current rate hike expectations, which is pricing for a rate cut in November next year. The view is reinforced by St Louis Fed President James Bullard, which thinks that markets are underestimating the odds of the Fed aggressively hiking next year. This seemingly heightened the risks of a hawkish recalibration in market expectations at the December Federal Open Market Committee (FOMC) meeting. Treasury yields remained somewhat little-changed for now, but several economic data, such as the US Personal Consumption Expenditures (PCE) price index and November job report, will be on close watch this week.

The Russell 2000 index has been trading within a near-term rising channel pattern since October this year, with recent downside bringing it towards its lower channel trendline support. The lower channel trendline and the subsequent 1,770 level may be key levels to hold, in order for the index to retain its near-term upward trend. Any break below the 1,770 level may potentially pave the way for a retest of its June and September bottoms at the 1,644 level.

Asia Open

Asian stocks look set for a negative to flat open, with Nikkei -0.83%, ASX -0.19% and KOSPI -0.02% at the time of writing. Tighter security in China yesterday has aided to refrain large-scale protests from materialising (some spill-over to Hong Kong) but nevertheless, the absence of any clear escalation in protests could aid to bring some calm to markets. The Nasdaq Golden Dragon China Index managed to close higher by 2.8% overnight. Recent protests have increased the pressure for China authorities to pull forward any reopening timeline but reiteration of its zero-Covid stance could still remain, especially with virus cases hovering at its record high. A ‘quiet’ implementation of virus measures in terms of lesser mentions of the zero-Covid stance moving forward could play out to appease public anger.

For the Straits Times Index (STI), after surging close to 12% over the past one month, recent downside has driven the formation of a bearish crossover on moving average convergence/divergence (MACD), as overbought technical conditions may call for some near-term moderation. Further downside may leave a downward trendline support on watch at the key 3,200 level. The SGX fund flow data over the past month revealed that weeks of robust net inflows from institutional investors have taken a pause, seemingly suggesting that the ‘dovish pivot’ narrative from the Fed has been priced and a new catalyst has to be sought.

On the watchlist: US dollar index defending key support at 105.00 level

A series of comments from Fed speakers and the dampened risk environment yesterday has left the US dollar index holding above its key support at the 105.00 level. This level marked previous dip-buying efforts back in mid-November with the formation of a bullish hammer candlestick, in coincidence with a key 38.2% Fibonacci retracement. Having hit oversold technical levels for the first time in 10 months, the bullish divergence formed on MACD may lift the chances for near-term upside, with the 105.00 level showing to be a crucial level to hold. Several economic data will be key for the US dollar this week in driving rate hike expectations. Any signs of persistence in pricing pressures from the US PCE price index or a more resilient labour market data may be catalysts to further renew US dollar upside.

Monday: DJIA -1.45%; S&P 500 -1.54%; Nasdaq -1.58%, DAX -1.09%, FTSE -0.17%