Overall market sentiments deteriorated notably last week, with concerns over the swift spread of Delta variant and return to lockdowns, Fed’s tapering and slowdown in China. A softening tone from a Fed hawk on tapering gave sentiment a late lift, but it remained to bee seen if that could last. Dollar ended as the strongest one, followed by Swiss Franc and Yen. But the three winners were actually very close with respect pairs staying in range only.
On the other hand, commodity currencies were under extremely heavy selling. Aussie was the worst as pressured by free fall in iron ore price and tougher pandemic restrictions. Kiwi followed as RBNZ changed their mind by keeping interest rate unchanged, as New Zealand returned to lockdown too. Canadian Dollar was dragged by extended correction in oil price. Jackson Hole Symposium is unlikely to be inspiration this week. Focus will remain on the virus, as well as overall risk market developments.
US stocks resilient as Fed hawks could adjust their tapering plan
US stocks displayed a lot of resilience last week as major indexes struck a sizeable rebound after initial selloff. On the one hand, the spread of Delta variant prompted some worries that the economic impact is going to last longer. Yet, sentiment was somewhat lifted as a known hawk in Fed indicated that he could be changing his mind on the timing of tapering.
Dallas Fed President Rob Kaplan had been clear that he’d prefer announcing the plan in September and then start tapering in October. But on Friday, he said he’s “watching very carefully” how the Delta would impact the economy, and he’d ready to “adjust” his views on policy somewhat. It’s not getting even more unlikely for Fed chair Jerome Powell to indicate anything concrete regarding tapering in the Jackson Hole Symposium this week. Indeed, we might hear more Fed hawks turning cautious if the situation worsen.
DOW recovered after hitting as low as 34690.3 and drew support from 55 day EMA, to close at 35120.1. Upside momentum weakened apparently as seen in daily MACD. Yet, there is no confirmed topping yet. The up trend is still in favor to extend to 61.8% projection of 26143.77 to 35091.56 at 37159.80. However, considering the possibility of bearish divergence condition in daily MACD, sustained trading below the 55 day EMA would raise the chance of a medium term correction, and turn focus to 33741.76 support for confirmation.
Nikkei and HSI broke support level as Asian outlook worsen
The picture in Asia, however, is much worse. Infections in Japan skyrocketed after the Olympics even though death tolls remained relatively low. Seven more prefectures declared state of emergency last week while the National Governors’ Association urged the government to imposing stricter lockdown.
Nikkei dropped through a key support level at 37385 finally, resuming the choppy fall form 30714.52. Such decline should be correcting the whole up trend from 16378.9. A main point to watch is whether there would be downside acceleration through falling channel support. But still, deeper decline to 38.2% retracement of 16378.9 to 30714.52 at 25238.3 is likely before the correction completes.
The set of data released from China last week also triggered some concerns over a serious slowdown in the second half. The aftermath of the massive flood in central Henan province is not reflected in the data yet. Additionally, return of the coronavirus to the country could drag the economy down. At the same time, the grip on sectors like tech, gaming, private eduction and real estate continued to tighten. It’s uncertain who would be the next target.
Hong Kong HSI broke near term support at 24748.8 last week, as the decline from 31183.35 resumed. The downside momentum suggests that more fall should be seen at least for the near term. Key level is indeed on 61.8% projection of 29394.7 to 24748.8 at 23951.3, which is close to 24k handle. Sustained break there could bring even deeper selloff to 100% projection to 21139.2 long