Global equity indices were a sea of green yesterday and today in Asia, perhaps due to strong quarterly earnings by big banks, but also due to a better than expected US initial jobless claims report and a slowdown in the nation's producer prices.
Today, we get the US retail sales for September, with investors eager to determine how much bottlenecks and high inflation impacted them.
Investors Increase Risk Appetite
The US dollar continued trading lower against all but one of the other major currencies on Thursday and during the Asian session Friday.
It lost the most ground versus NZD, CAD, and AUD in that order, while it eked out some gains only against JPY.
The performance in the FX world points to further improvement in investors' risk appetite, which is also evident by the performance in the equity world.
Major EU and US indices soared on average 1.42% each, with the optimism, although softer, rolling into the Asian session today as well.
Market participants continued buying stocks, perhaps due to strong quarterly earnings by big banks, like JP Morgan (NYSE:JPM), Citigroup (NYSE:C), Wells Fargo (NYSE:WFC), and Bank of America Corp (NYSE:BAC).
All four banks reported a combined profit of $28.7 billion for the third quarter. Elsewhere, US initial jobless claims fell by more than expected last week, while producer prices slowed somewhat on a monthly basis.
In our view, this was a blend of developments pointing to an improving US economy, but without the fear of inflation accelerating further. One could argue that this is just a day's data and that on Wednesday, the headline US CPI ticked higher. In our view, it seems that with equities correcting, investors may have jumped back into the action due to fear of missing out.
Wednesday, the inflation data revealed a slight acceleration. As a result, US equities were up, indicating the extent to which the Fed's aggressive tightening is priced in. The Producer Price Index (PPI) is a forward-looking indicator. Producer prices feed into future consumer prices, and thus, a slowdown may have raised some hope that the Consumer Price Indexes (CPIs) could ease somewhat in the months to come.
Until yesterday, we were reluctant to turn our eyes to the upside, and we said there was a chance for another setback in equities. In our view, with no significant change in the fundamental background, a chance of a correction remains on the table.
Technically, several equity indices pointing to breaks above significant downside resistance lines. Investors may have already accepted that the Fed will taper in November and raise interest rates next year. That said, we are far from a long-lasting recovery. We will take things step by step, and we will re-evaluate with the first sign of weakness.
Today, the main economic release on the agenda is the US retail sales for September. Market participants will pay close attention to this report to see how much bottlenecks and inflation affected sales. The consensus is for headline sales to slide somewhat and for core ones to increase, but at a slower pace than in August.
Exceeding forecasts may suggest that the economy is faring better than many believe, despite the surge in inflation. This could be positive for equities and the US dollar, allowing policymakers to implement their monetary policy plans. Worse-than-expected data could have the opposite effect.
DJIA – Technical Outlook
The Dow Jones Industrial Average cash index surged yesterday, breaking above the downside resistance line drawn from the high of Sept. 3, as well as above 34985, marked by the high of Oct. 7, confirming a forthcoming higher high. In our view, this has turned the short-term picture into a positive one.
We would expect participants to challenge the 35110 level soon, marked by the high of Sept. 10, the break of which may extend the advance towards the 35280 area, which acted as support between Aug. 31 and Sept. 6.
If that zone cannot stop the bulls, extension towards 35520, which acted as a ceiling between Aug. 25 and Sept. 6, is likely. We will aim lower if we see a retreat below 34610, a support marked by the inside swing high of Oct. 12.
This could confirm the index's return below the downside line and pave the way towards the 34260 barrier, or the 34100 hurdle, marked by the low of Oct. 13. Another break below 34100 could extend the fall towards the 33845 territories, which acted as a support on Oct. 4, 5, and 6.
USD/JPY – Technical Outlook
USD/JPY edged further north yesterday, and today in Asia, it managed to overcome the 113.80 level, marked by Tuesday's and Wednesday's highs.
This has confirmed a forthcoming higher high, which, combined with the fact that the pair is trading above the upside support line drawn from the low of Sept. 22, paints a positive near-term picture.
We believe that the bulls could soon target the 114.20 level, marked by the peak of Nov. 12, 2018, the break of which could extend the advance toward the apex of Oct. 4, 2018, at 114.55.
If they don't stop there either, we could see them climb even higher, perhaps to the 115.50 area, marked by the high of March 10th, 2017. The move that could signal a short-term reversal may be a dip below 112.17, a support marked by Monday's low.
The dip could head towards the 111.80 level, the break of which could see scope for declines towards the 111.20 or 110.83 barriers, defined as supports by the lows of Oct. 6 and 4, respectively. Now, if the bears are strong enough to overcome both of those obstacles, the next territory to consider may be at 110.43, marked by the inside swing high of Sept. 8.
Elsewhere
Besides the US retail sales, the other data releases worth mentioning are the New York Empire State manufacturing index for October and the preliminary University of Michigan consumer sentiment index for the same month. New York Fed President John Williams is due to speak today.