Federal Reserve (Fed) Chair Jerome Powell took the stage yesterday with a series of hawkish comments and while Fed funds futures did not register much change in terms of interest rate expectations, US equities seem to take his words more seriously (DJIA -0.30%; S&P 500 -0.52%; Nasdaq -1.21%).
The Fed Chair maintained his stance that “the fight against inflation still has a long way to go” and that most central bank officials expect interest rates to continue to rise, but there is still a significant degree of data dependence. This leads to less commitment and more wait-and-see in central bank guidance, with the Fed Chair even calling further rate hikes (50 basis points) “a pretty good guess”.
As a result, the US dollar failed to advance overnight (-0.45%), while government bond yields trimmed their initial gains to close broadly unchanged to slightly higher. The gold price managed to recover somewhat, although the formation of a new low on the daily chart still indicates some exhaustion. As the Fed Chair continues to cite the tight labour market as justification for a further tightening stance, US jobless claims will be in focus today.
After a rise of almost 10% since the beginning of the month, a slight head-and-shoulders formation seems to be forming as the index failed to break above resistance at 1,900 points. It could still be a consolidation phase for a further rise, but for now the bearish MACD (Moving Average Convergence/Divergence) crossover suggests some short-term exhaustion. A break of the neckline below the 1,850 level could pave the way to the 1,810 level, where a confluence of supports could underpin a higher low.
Source: IG charts
Asian equity markets open mixed: Nikkei -0.04%, ASX -0.80% and KOSPI +0.36% at the time of writing. Despite the general correlation with the US, the Nikkei has shown some resilience this morning despite the bad news from Wall Street. On the other hand, the ASX 200 appears to be on track for its second consecutive day of losses, having recouped almost half of its gains over the past two weeks.
Markets in Hong Kong and mainland China are closed today for the Dragon Boat Festival, giving Chinese stocks some respite from renewed tensions in US-China relations. China took exception to the US President’s comment that President Xi is a “dictator” and resisted the notion that US-China relations could be warmed by Foreign Secretary Antony Blinken’s visit.
In the coming day, interest rate decisions in the Philippines and Indonesia will take centre stage, with both central banks expected to keep rates unchanged. Instead, the focus could be on the Bank of England’s (BoE) interest rate decision, which is widely expected to tighten further.
The Straits Times Index continues to move within a symmetrical triangle pattern, indicating some indecision in the markets. As the index approaches the apex of the triangle, a possible breakout can be seen on either side, suggesting that buyers or sellers are taking control. A break of the lower triangle trendline could lead to the March 2023 low at 3,100 points being put to the test.
Source: IG charts
On the watchlist: GBP/USD on hold ahead of BoE meeting
Another round of positive surprises in UK May inflation did not provide any relief to the BoE ahead of its meeting today, with the central bank likely to stick to its hawkish stance that the tightening cycle is far from over. However, the GBP/USD’s initial reaction to the inflation data was mixed, with much hawkishness already priced in, while a further 150bp tightening comes with a higher drag on growth conditions, making a UK recession more likely than not.
With a 25bp rate hike at the upcoming meeting considered a foregone conclusion and a 6% policy rate expected, the pair appears to be largely on hold awaiting further confirmation from the central bank. The higher highs and lows since September last year continue to suggest an uptrend, with a number of support lines (200-day MA, downtrend line support, Ichimoku) holding a higher low in case of a pullback. In case of an upward move, resistance could be at 1.300.
Source: IG charts
Wednesday: DJIA -0.30%; S&P 500 -0.52%; Nasdaq -1.21%, DAX -0.55%, FTSE -0.13%