European and US indices kept sliding yesterday as investors remained fearful over surging inflation harming the global economy. Sentiment improved during the Asian trading after China cut its five-year loan prime rate by more than anticipated.
However, with the fundamental landscape staying largely unchanged, we still believe that the path of least resistance for equities is to the downside and the dollar to the upside.
China’s Rate Cut Supports Sentiment, but Broader Outlook Remains Dismal
The US dollar traded lower against all the other major currencies on Thursday and during the Asian session Friday, losing the most ground against CHF, JPY, and EUR in that order, and losing the least versus CAD.
The strengthening of the Swiss franc and the Japanese yen suggests a risk-off trading activity, but the weakening of the US dollar points otherwise. Perhaps there was an extension of Wednesday’s risk aversion into Thursday, but things changed at some point during the day or today in Asia.
Indeed, turning our gaze to the equity world, major EU and US indices continued to slide. Still, appetite improved during the Asian session today, with all Asian indices under our radar trading in the green.
It seems that EU and US shares continued to feel the heat of concerns over the effects of high inflation after Target Corp (NYSE:TGT) announced that quarterly profits halved and that a bigger margin hit later this year is very likely due to rising fuel and freight costs. What may have prompted investors to extend their selling during the US session may have been Cisco (NASDAQ:CSCO) Systems’ dismal outlook, with the individual stock slumping around 13.7%.
But why did market morale improve during the Asian session today? Perhaps due to China’s decision to cut its five-year loan prime rate (LRP) by 15bps this morning, a deeper-than-expected cut, a decision to cushion the economic slowdown. However, the one-year LPR was left unchanged at a time when most respondents to a Reuters poll had been anticipating 5bps cuts in both rates.
We stick to our guns that the path of least resistance for equities is to the downside, and for the dollar still to the upside. Despite China’s policy move today to support the economy, the nation’s financial hub of Shanghai announced three new coronavirus cases outside of quarantined areas, which could heigh on hopes that strict restrictions and lockdowns could be eased soon.
On top of that, concerns over high inflation keep elevated expectations and bets over fast tightening by some major central banks and intensify fears over a global recession. And as if stagflation is not an important reason for investors to be nervous, the war in Ukraine is still raging, which could make things worse.
Even if it doesn’t escalate beyond a two-nations military conflict, its prolonged duration could hurt global supply chains and, thereby, the global economic outlook.
NASDAQ – Technical Outlook
The NASDAQ cash index traded lower yesterday but hit support at the 11690 zone, marked by the low of May 12, and then it rebounded somewhat. Overall, this index remains below the downside resistance line taken from the high of Apr. 5. Thus, even if the current recovery continues for a while more, as long as the index stays below that line, we will consider the short-term outlook somewhat bearish.
The bears could retake charge soon and aim for another test near the 11690 zone, the break of which would confirm a forthcoming lower low and may initially target the 11505 zone, marked by the low of Nov. 10, 2020. If the bears are unwilling to stop there, then a break lower could carry extensions towards the low of Nov. 2, 2020, at 10940.
On the upside, we would like to see a clear break above 12935 before examining the bullish case. This could confirm the break above the aforementioned downside line and may initially pave the way towards the 13545 zone, which provided key resistance between Apr. 26 and May 5.
Slightly higher lies the 13745 barrier, marked by the inside swing low of Apr. 18, the break of which could carry extensions towards the 14285 zone, marked by the peak of Apr. 21.
AUD/JPY – Technical Outlook
AUD/JPY has been consolidating since Wednesday, staying between the 89.00 and 90.25 barriers. In the bigger picture, the pair is still below the downside resistance line taken from the high of Apr. 20 and below a shorter-term upside one taken from the low of May 12. This suggests a decent chance for the bears to retake charge soon.
If so, we could see another test near the 89.00 zone, the break of which could initially challenge the 88.45 barrier. If that barrier is also broken, we may experience extensions towards the low of May 12, at 87.25, where another break could carry extensions towards the 85.85 territory, marked by the inside swing high of Mar. 13.
On the upside, we will start examining the bullish case upon a break above 92.90. This will take the rate above both of the aforementioned diagonal lines, a move that could encourage the bulls to climb towards the peak of May 4, at 94.05. If they are not willing to stop there, we may see them sailing further north, perhaps aiming for the peak of Apr. 20 at 95.75.
