Major US stock indices have managed to stage a strong rebound to snap their respective two days of consecutive losses since Monday. The S&P 500, Nasdaq 100 and Dow Jones Industrial Average posted similar gains of around +0.90% with outperformance seen in the small-caps index, Russell 2000 that rallied by +2.35% to close at 2,239 after being the underdog for the past four weeks. Despite yesterday’s rally, the Russell 2000 is still below its intermediate range resistance of 2,280 that has capped previous rallies since 5 April.
Yesterday’s up move seen in the US stock market was not triggered by any clear macro catalysts, a similar observation seen from the previous sessions where the overall market was down for two consecutive days despite most earnings reports exceed expectations; note that we are in the second week of US Q1 earnings reporting session. Strong market breadth statistics for yesterday as number of advancing stocks outpaced declining stocks by a ratio of three to one in both the NYSE and Nasdaq exchanges.
S&P sectors performance indicated a broad-based rally where nine of out eleven sectors were in the green. Cyclical/value plays seemed to be back in vouge with outperformances seen in Materials +1.87%, Energy +1.47%, Financials +1.39% and Industrials +1.36%. Hence, recent price actions seen in the major US stock indices are consistent with consolidation activities rather than a distribution phase which implies that their respective medium-term uptrend remains intact with exception of Russell 2000 that is likely to be evolving within a range between 2,367 and 2,065.
Positive follow through movements are seen in several key benchmark Asian stock indices at this time of the writing; Japan’s Nikkei 225 +2.07%, South Korea’s KOSPI 200 +0.48%, Hong Kong’s Hang Seng Index +0.42&, Hang Seng TECH Index +0.84%, Australia’s ASX 200 +0.30% and Singapore’s Straits Times Index +0.63%..
Over to the foreign exchange market, the US dollar has continued its recent multi-week weakness against the major currencies in place since 31 March where the US Dollar Index shed -0.10% to close at 91.11 yesterday; below its former 91.47 key medium-term support that has been broken down on 19 April. Hence from a technical analysis, the odds are now in the favour of USD bears where an impulsive down move on the US Dollar Index may kick start at this juncture to resume its major downtrend phase in place since March 2020.
An important FX pair to note will be the USD/CNH (offshore yuan) where it has declined by 1060 pips (-1.6%) from its 1 April high of 6.5876 to print a current intraday low of 6.4816. Earlier in February, USD/CNH bears managed to stall at its 6.40 major support (the lower boundary of an ascending channel in place since January 2014 low). Downside momentum has resurfaced as seen on its daily Relative Strength Index (RSI), thus from a technical analysis perspective, the odds for a major bearish breakdown below 6.40 on the USD/CNH has increased at this juncture. Given its high indirect correlation with the movement seen in Asia ex Japan and emerging markets stocks in the past, a further potential down move in USD/CNH below 6.40 may led to a significant rotation back into Asia Ex Japan and emerging markets stocks given their current underperformance in general versus US and Europe.
ECB monetary policy meeting in the horizon today, outcome of the meeting out later at 1145 GMT with ECB President Lagarde press conference at 1230 GMT. A potential non-event for the foreign exchange market as consensus is set at status quo on its current accommodative monetary policy stance. However, market participants will be paying close attention during the press conference on ECB’s view on the current uptick in global businesses costs that can lead to a higher inflationary environment in the Eurozone in the coming months, thus to lookout for any hints whether there will be an increase in odds on tapering its bond buying programme in the second half of 2021.
Chart of the day – USD/CNH
USD/CNH at risk of major breakdown below 6.40click to enlarge image
source: CMC Markets