Reversal in risk sentiments following hawkish takeaway: Russell 2000, AUD/USD, US dollar index

[MongiIG]

Major US indices initially surged upon the release of the Fed’s policy statement, but reversed heavily after Fed Chair Jerome Powell took the stage at the press conference.

Source: Bloomberg

 

Forex Indices Federal Reserve United States United States dollar Jerome Powell

 Yeap Jun Rong | Market Strategist, Singapore | Publication date: Thursday 03 November 2022

Market Recap

Major US indices initially surged upon the release of the Federal Reserve (Fed)’s policy statement, but reversed heavily after Fed Chair Jerome Powell took the stage at the press conference. The current meeting presented the fourth 75 basis-point (bp) hike to 3.75%-4%, which were largely priced in, but there are two other key factors on watch – the pace of subsequent rate hikes and the terminal rate. For the former, the Fed statement has delivered. A key addition to the statement showed an adjustment in Fed’s stance in determining future rate increases, which suggests that the downshifting to 50 bp hikes may take place in the December meeting and thereafter. (“In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments”)

While this was initially cheered by Wall Street, the optimism was dampened when Fed Chair Jerome Powell shifted the focus away from the ‘dovish pivot’ story and made clear his ultimate resolve to bring down inflation. His comments that tightening still has “some ways to go” and particularly, “it is very premature to be thinking about pausing” are perceived to be more aggressive and hawkish than before. While both Treasury yields and the US dollar initially retraced, they found renewed upside on those comments, as market expectations for the terminal rate above 5% has seen some build-up. The uplift in longer-term rate expectations could also come after recent outperformance in US economic data, which suggests that economic conditions are not moderating as quickly for a quicker turnaround in policy path.

The Russell 2000 index has failed to break above a confluence of resistance at the 1,850 level, where an upper channel trendline resides with its 200-day moving average (MA), along with a key 23.6% Fibonacci retracement. Trading within the near-term ascending channel pattern may place the 1,740 level on watch next for any near-term support. Given the more downbeat risk environment, a downward break below the lower channel trendline support may pave the way to retest of its September bottom.

 

Source: IG charts

 

Asia Open

Asian stocks look set for a negative open, with ASX -2.14% and KOSPI -1.49% at the time of writing. Japan market is closed for holiday today. Optimism around economic reopening rumours in China has driven a second day of gains for Chinese equities, with the Nasdaq Golden Dragon China Index closing 1% higher. That said, the sharp reversal in Wall Street overnight and the lack of a positive follow-through from US equity futures could put a pause on the rally, as investors continue to digest the slower pace, but higher terminal rate from the Fed.

A more positive headline could come from a 32% jump in quarterly profit from DBS, with a record high in both total income and net profit. A 32 bp boost in net interest margins has uplifted its net interest income by 23% from the previous quarter. In line with previous quarters, loan growth continues to moderate to the mid-single digit (+5.9% year-on-year (YoY)), which is guided to trend even lower over the coming quarter. That said, resilience in asset quality is presented with a downtick in non-performing loan ratio despite the moderation in global economic conditions. While allowances did see some build-up, it could be due to some catching up as previous quarters saw lesser build-up (some reversal in quarter three (Q3) 2021). Non-interest income also held up well with a 4.6% growth YoY, reversing its decline over the past two quarters.

For the AUD/USD, after consolidating around the 0.640 level on some wait-and-see over the past few days, a retest of a downward trendline overnight on the swings in US dollar movement was met with a bearish rejection. The formation of the lower highs continue to point towards a downward bias, which could leave the October bottom at the 0.617 level on watch next. A greater indication of a reversal in bearish sentiments could come with any upward break above the trendline resistance, which coincides with its 50-day MA.

 

Source: IG charts

 

On the watchlist: US dollar index found support on hawkish takeaway

With the hawkish takeaway from Fed Chair Jerome Powell, the US dollar reversed initial losses overnight after finding support at the 110.20 level. This marks a continuation of its recent bounce from the lower channel trendline of a near-term descending channel pattern and seemingly places the upper channel resistance at the 113.00 level on watch over the coming days. The US non-farm payroll will be the next key determinant. Recent US labour market data this week have been revealing upside risks and further outperformance on the October job report could further underpin strength for the US dollar and anchor its overall upward trend.

 

Source: IG charts

 

Wednesday: DJIA -1.55%; S&P 500 -2.50%; Nasdaq -3.36%, DAX -0.61%, FTSE -0.58%