Market Insight: Week Ending 25 August

It has not been the best of weeks for markets, with global equities well and truly hitting the ropes.

In the US, major US equity indices and government bonds fell amid concerns over interest rates in the US remaining higher for longer. Consequently, US government bond yields rallied across the curve, nearing 16-year pinnacles for the benchmark 10-year yield. This, alongside growing concerns about China’s economy and property market, weakness in the Yuan and losses in the shadow banking sector and missed payments, added weight to market sentiment.

Yields for government bonds in Europe also experienced a notable uptick, with the UK’s 10-year gilt yields reaching their highest point since 2008 and Germany’s equivalent yields rising to levels not seen since 2011. In the FX space, the US dollar attracted a safe haven bid consequently weighing on major currency peers), and precious metals pursued lower ground, along with a broad-based sell-off in the crypto space.

The FOMC minutes was one of the highlights last week and certainly stirred the pot regarding the market’s perception of the direction of the Fed Funds rate. The minutes surprised markets by striking a hawkish tone. The minutes noted that ‘with inflation still well above the Committee’s longer-run goal and the labour market remaining tight, most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy’. Despite this, the market appears to overlook the possibility of another rate hike, with markets only pricing a 14% chance of a 25bps increase at the September meeting.

China’s economy was also a major talking point last week, weighing on market sentiment. Instead of the Chinese economy coming out of the gates raring to go following three years of zero-covid policy, we have seen the opposite. A series of economic data points have come in lower than expected in July. China’s economy also fell into deflationary territory at the beginning of the month as consumer prices declined for the first time since early 2021, with both the year-on-year CPI and PPI measures now deflationary. Retail sales also rose by only 2.5% in the twelve months to July (vs expected 4.5% [down from 3.1%]). Additionally, industrial production rose less than expected at 3.7% in the twelve months to July (vs expected 4.3% [down from 4.4%]), and China’s jobless rate ticked higher to 5.3%, up from 5.2%.

Wage and inflation numbers were the highlight for the UK last week. Unemployment jumped to 4.2% in June (vs 4.0% expected [up from 4.0% previous]). Additionally, private sector wage growth rose more than expected in the three months to June and surpassed inflation for the first time since October 2021 (underpinned largely by one-off payments to NHS staff in June). A day later, we saw consumer prices had eased to 6.8% in the twelve months to July (down from 7.9% in June and in line with market forecasts), driven lower by declining gas and electricity prices.

Core inflation for the same period was slightly higher than expected at 6.9%, versus the 6.8% expected, while YoY services inflation picked up to 7.4%, from 7.2%, which will be of particular interest to the Bank of England (BoE). Friday also observed retail sales for July fall -1.2% for the first time in three months (up from a 0.6% rise in June). The market is now pricing around 75bps of tightening, marking an increase of approximately 30bps from previous levels. The terminal rate is forecast at around 6.0%, and markets are almost fully pricing in another 25bp hike (85% probability) at the next MPC meeting on 21 September (this would mark its 15^th consecutive rate hike).

This Week…

The main focus for the US space this week will be on US Fed Chairman Jerome Powell’s speech at the Kansas City Fed’s Jackson Hole Economic Policy Symposium on Friday morning at 10:08 am ET. Markets will be watching the chief’s speech for clues about the direction of interest rates. Markets are almost fully pricing in a pause at the next Fed meeting on 20 September, with rates projected to remain in restrictive territory well into 2024. Other US macroeconomic points to be aware of this week are US manufacturing PMIs on Wednesday, durable goods orders data, and the weekly unemployment claims number on Thursday. Additionally, new and existing home sales for July will be available this week, as well as consumer sentiment data.

In the UK, eyes will be on the manufacturing and services PMI data, both of which are expected to come in lower than the previous month. It is much the same as the UK for the euro area this week. Focus is on the manufacturing and services PMI data, with the former expected to remain pretty much unchanged at 42.7 and the latter anticipated to drop to around 50.5.

G10 FX (5-Day Change):

Investors Seek Safety in the US Dollar; Trendline Resistance Breach

For those following my Weekly Market Insights, you may recall that I noted the possibility of further dollar upside in recent writing. As you can see, the buck ended a fifth week in positive territory, adding +0.6%. August has also seen the greenback add +1.5% MTD.

Kicking things off with the monthly scale, the trend remains firmly higher. I noted the following in previous writing (italics):

The long-term trend has been northbound since bottoming in 2008 at 70.70 if one focusses on the longer-term swings. Q4 (2022), as you can see, printed a noteworthy correction from 114.78 (from channel resistance), which remains active in 2023.

I also recently touched on the fact that price action recoiled from a substantial support level on the monthly timeframe at 99.67 in July (complemented by two neighbouring Fibonacci ratios [38.2% and 61.8%] at 98.72 and 98.95, respectively). This, of course, adds weight to the bullish offensive we have been seeing in recent weeks and is in harmony with the overall trend.

Meanwhile, on the daily timeframe, thanks to a healthy bid higher last week, candle action navigated beyond trendline resistance, drawn from the high of 114.78, and the 200-day simple moving average, currently circling 103.20. Closing above the aforesaid technical structures might be viewed as a bullish trend reversal signal. The question is whether the recent USD optimism is a genuine trend reversal to the upside on the daily timeframe (markets are fractal; while we are trending higher on the weekly, we’ve been trending lower on the daily since topping at 114.78).

Technically, considering where we’re trading from on the monthly timeframe and the longer-term trend direction (north), in addition to daily flow progressing beyond trendline resistance and the 200-day simple moving average, the US dollar may still have some legs and consequently explore higher ground over the coming weeks, potentially targeting daily resistance at 104.78.

Sentiment Hit; S&P 500 Pencils in a Third Consecutive Weekly Loss

MTD, the S&P 500 is down -4.8%, with last week closing lower by -2.1%.

Concerns over rates remaining higher for longer and the situation in China positions the S&P 500 benchmark on the verge of snapping a five-month winning streak.

To the upside on the monthly chart, the all-time high at 4,818 (set at the beginning of 2022) remains a logical target, in a market trending higher since early 2009. Should sellers remain in the driving seat, nevertheless, support warrants attention at 4,056.

Price action on the weekly chart wrapped up recent trading pencilling in a third consecutive bearish week and ended on the doorstep of 4,325 support, shadowed by another layer of neighbouring support from 4,300. It has essentially been a one-way market to the downside since we shook hands with resistance at 4,595, a base accompanied by channel resistance drawn from the high of 4,100 and an overbought signal out of the Relative Strength Index (RSI).

Sliding across to the daily chart, it is clear that the index made its way south of the 50-day simple moving average at 4,452 last week, which, by and of itself, is viewed as a bearish trend reversal signal by some market technicians. It is also evident that Friday staged a moderate rebound after probing bids at support from 4,363. Given how deep we moved beyond the aforementioned level, it is likely a number of sell-stops were tripped which exposes support marked on the weekly chart at 4,325.

While buyers could defend daily support at 4,363 this week, the weekly support zone between 4,300 and 4,325 holds more technical weight. Therefore, this may serve as a magnet to price in the short to medium-term, consequently prompting further bearish plays this week and engulfing the current daily support base.

Precious Metals Underwater

Down nearly -4.0% MTD, spot gold (XAU/USD) erased -1.3% last week and dropped in on a descending resistance-turned-support taken from the high of $2,070 on the weekly chart. In view of limited bullish intent from the weekly base at the end of the week, along with the precious metal now signalling an early downtrend (since topping near the all-time high of $2,075) and the Relative Strength Index (RSI) navigating south of 50.00 (negative momentum), traders and investors may pencil in the possibility of further downside towards weekly support coming in at $1,823.

What’s interesting from a technical perspective is that price also made its way below support on the daily timeframe at $1,895, following a break beneath the 200-day simple moving average, currently at $1,905. You will note that price also retested the underside of the breached support on Friday, echoing a possible follow-through to the downside towards daily support from $1,866 this week.

Spot Silver (XAG/USD) welcomed some respite last week, ending the week unchanged and forming an indecision candle after four consecutive weeks of losses. The daily timeframe reveals resistance overhead at $23.31, while just beneath current price, support calls for attention at $22.18. These two aforementioned levels will likely be watched closely this week, with a break of support potentially opening the gates for a bearish breakout scenario towards daily support at $21.03. Rupturing current resistance, on the other hand, could shine the technical spotlight on daily resistance coming in at $23.97.

Regarding trend, the daily timeframe shows we have been higher since September last year, though the corrections within the uptrend have been somewhat muscular and likely concern current buyers. Therefore, a break of current support at $22.18 should not surprise this week.

What Is Going On in the Crypto Space?

BTC/USD

Following nearly two months of decreased volatility in the crypto space, a broad-based crypto sell-off was seen in the second half of the week, alongside a broader global risk-off tone. According to reports, the slump was triggered on a combination of SpaceX taking a significant write-down on its Bitcoin holdings, as well as the notion of higher-for-longer rates that have taken hold.

The technical view for Bitcoin against the dollar shows that the market is down more than 10.0% WTD. On track to record its largest one-week loss this year, BTC/USD is shaking hands with support on the weekly timeframe at $25,381. This follows a rejection from weekly resistance overhead at $30,644. The key observation here for me at the moment is the noted weekly support level; rupturing the above-noted base unearths support from $23,144, closely shadowed by another layer of support at $19,985.

Across the page on the daily timeframe, we can see that the rebound from weekly support was rather punchy, with resistance calling for attention nearby at $27,221, a level complemented by the 200-day simple moving average at $27,291. The aforementioned level will be a key base to watch this week.

A successful retest of $27,221 would reinforce the bearish notion and place a bold question mark on weekly support (beneath weekly support on the daily timeframe, support is seen at $24,262) and also question the uptrend since late 2022 (see weekly timeframe). Should the approach form an AB=CD structure, this would help add weight to bears making a show. A break back above $27,221, on the other hand, opens the door for possible buying opportunities while pushing through $25,381 this week could fuel downside pressure towards $24,262.

Charts: TradingView

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