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Wall Street’s Resilience Amidst Rising Yields and Dollar Strength

Wall Street's resilience

Wall Street’s resilience, Fed Chair’s outlook, and Brent crude resurgence amidst rising Treasury yields – Market Insights.

Wall Street’s resilience in the face of recent sell-offs despite climbing Treasury yields and a strengthening US dollar, which gained 0.4%. The US 10-year yields saw another five basis-point increase, surpassing 4.60%. This development has led to a bear steepening trade in the yield curve, as market participants embrace the belief that high-interest rates will persist. An exciting development to monitor in the medium term is the potential un-inversion of the 10-year/2-year Treasury yield spread, a historical precursor to recession on the last four occasions.

Wall Street’s Resilience Amidst Rising Yields and Dollar Strength

As we look ahead, all eyes are on the final reading of the US 2Q GDP. Unless there is a significant deviation from the initial figures, the reaction to the data, despite reflecting past trends, is expected to be short-lived. Current expectations anticipate a slight uptick in the GDP growth rate from 2% to 2.1%.

The focal point of interest may shift to insights regarding the US monetary policy outlook provided by Fed Chair Jerome Powell’s upcoming speech. Given the absence of crucial economic data since the recent Federal Open Market Committee (FOMC) meeting, Powell is likely to adhere to the original Federal Reserve (Fed) meeting script and keep the possibility of additional rate hikes open, pending forthcoming data.

The S&P 500 is retesting the lower trendline of an ascending channel pattern since October 2022, presenting a critical juncture for buyers. The weekly Relative Strength Index (RSI) has also returned to the pivotal 50 level, which could determine the broader trend ahead. Failure to defend the lower channel trendline support might pave the way for a retest of the 4,150 level.

Asian Markets Open with Mixed Sentiment

At the time of writing, the Nikkei is down 0.70%, and the ASX is up 0.24%, setting the stage for a mixed opening in Asian markets. Korean markets are closed for the Mid-Autumn Festival today and tomorrow. Today’s relatively quiet economic calendar may lead to subdued sentiment, with caution regarding risk-taking continuing to revolve around developments in China’s property sector. The suspension of trading in China Evergrande’s shares and the police surveillance of its chairman are bolstering the likelihood of liquidation. At the same time, a bailout from authorities remains improbable, given their series of more indirect measures to support the property sector.

One index to watch closely is the Nikkei 225, which is struggling to maintain its lower edge of the Ichimoku cloud at the 32,000 level. This level also aligns with a 23.6% Fibonacci retracement level, and failing to maintain it could result in a retest of the 30,800 level, where the lower channel trendline support resides. Near-term upward momentum remains weak, with the daily Moving Average Convergence/Divergence (MACD) looking to cross below the zero line.

Brent Crude Prices Eyeing a Retest of Recent High

Brent crude prices have rebounded, surging more than 3% over the past two trading days and potentially aiming for a retest of their recent September high at the US$95.00 level. Another week of substantial drawdown in US crude oil inventories, with a decrease of 2.17 million barrels compared to an expected 0.32 million, continues to support tightening supplies since August, overshadowing concerns about China’s economic growth and a stronger US dollar.

In the near term, all eyes are on whether Brent crude can surpass its September peak, forming a new higher high and reinforcing the upward trend since June. The weekly MACD has crossed the zero line, indicating positive momentum, and the RSI above 50 suggests buyers are currently in control. Further upside potential may put the US$98.00 level on the radar as the next resistance point to overcome.

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