While a rate pause outlook should have been a boost to risk sentiments, the downplaying of rate cuts prospects in Fed Chair Jerome Powell’s messaging seems to be a pushback against broad market expectations.
As expected, the US Federal Reserve (Fed) delivered a 25 basis-point hike overnight to bring its benchmark lending rate to the 5.00%-5.25% range. Some softening in the policy statement language also reflects a more data-dependent stance, which provides the conviction that the central bank will likely shift towards a rate pause for some wait-and-see next. Particularly, the previous guidance that “some additional policy firming may be appropriate” was omitted.
While a rate pause outlook should have been a boost to risk sentiments, the downplaying of rate cuts prospects in Fed Chair Jerome Powell’s messaging seems to be a pushback against broad market expectations, which were pricing for 75 basis-point worth of cuts by the end of this year. Rate expectations did not adjust in the aftermath of the Fed Chair’s guidance, revealing firm expectations that economic conditions will likely moderate sharply over coming months to force the Fed into shifting its stance.
Confidence in the banking space remained unresolved as well, with the plunge in share prices among regional banks revealing an ongoing hunt for the next 'domino' to fall. PacWest Bancorp shares were 53% lower after-market. The SPDR S&P Regional Banking ETF continued to see losses (-1.8%), more notably on heavy selling volume.
Overall, major US indices pared earlier gains to close in the red overnight (DJIA -0.80%; S&P 500 -0.70%; Nasdaq -0.46%). Treasury yields reacted to the downside as well, dragging the US dollar 0.5% lower. Thus far, intermittent attempts for a bounce in the US dollar have been short-lived, with recent downside setting its sight on the key 100.50 level of support once more. Multiple retests will likely drain the supply of buyers and lift the chances of a downward break, with any breakdown of the 100.50 level potentially paving the way towards the 99.00 level next.
Asian stocks look set for a weaker open, with ASX -0.65% and KOSPI -0.27% at the time of writing. Japan markets remain closed for holiday and will be back online next week. Ahead, Caixin manufacturing Purchasing Managers' Index (PMI) figure out of China will be in focus to provide a view of smaller manufacturers’ conditions. Recent downside surprise in the official data suggests a lacklustre recovery, which could be highlighted in the upcoming data as well.
Recent downbeat risk environment has forced the Hang Seng Index into a new near-term lower high, with the index seemingly heading back to retest its key 200-day moving average (MA) once more. Greater conviction for the bulls may have to come from a move back above the 20,800 level, where a confluence of resistance stands. Since the start of the year, the economic surprise index for China has been heading higher, which revealed greater outperformance in economic data compared to expectations. Further positive surprises will remain on watch to further support its medium-term upward bias.
On the watchlist: Gold prices back to retest all-time high once more
The confluence of an impending rate pause from the Fed and lingering jitters in the US banking space has propelled gold prices by another 1.6% overnight, with a bullish crossover on Moving Average Convergence/Divergence (MACD) suggesting some reversal in momentum to the upside.
That said, prices are currently retesting a key resistance at the US$2,068 level, where its previous peaks in 2020 coincide with an upper channel trendline resistance. With gold prices trading within a longer-term consolidation pattern since 2020 (weekly chart), a break to a new all-time high will carry great significance in paving the way to the US$2,400 level.
Wednesday: DJIA -0.80%; S&P 500 -0.70%; Nasdaq -0.46%, DAX +0.56%, FTSE +0.20%