Optimism, bordering on jubilation, prevailed in stock markets yesterday, although traders in FX and gold stood aloof for the most part.
A sigh of relief washed over in US stocks, causing sharp buying on news that the US government debt ceiling had been raised by $480 billion until December, removing the threat of a default by the world's largest economy.
However, by the end of the day, the effect of this news wore off after the initial surge. The markets are likely to spend most of today in very tight ranges and low volumes, waiting for US labor market figures for September.
The Chinese bourses, which opened after a week-long holiday, are enjoying an influx of buyers on reduced fears of a domino effect from the Evergrande (OTC:EGRNY) default.
In addition, Chinese business activity data were also bullish, marking a return to expansion in services and manufacturing last month after a dip in August.
Chinese indexes are gaining about 1% today despite the liquidity squeeze from the People's Bank of China (PBC). This is a sign that the market already sees an indiscriminate sell-off in Chinese assets, as seen in previous weeks.
The cautious sentiment in US equity markets, where selling prevailed towards the end of the day, could reflect that the funds prefer the sell-the-growth tactic.
The pressure on the S&P 500 intensified after reaching the 50-day average. But interestingly, earlier, the European indices (DAX, FTSE 100, and several others) and the Dow Jones found strong buying when they touched the 200-day average.
The tug-of-war between bulls and bears is underway between these technical levels. Going beyond them could trigger the surrender of one of the sides, causing the start of a powerful trend.
Market Holds Its Breath Ahead of US Jobs Data
The US economy is expected to create 490,000 new jobs in September. If the actual data comes out better, the Fed could roll back QE as early as next month.
Positive news from the labor market could boost the dollar, pushing it to one-year highs. Despite the oversold conditions in EUR/USD, in the case of strong NFP, the pressure on the pair could increase, making a decline to 1.1400 possible as early as next week.
Separately, increasing the government debt ceiling would allow the US Treasury to sharply increase bond auctions, sucking liquidity from the market to normalize its cash reserves, which is positive for the dollar.
But together with a reduction in balance sheet purchases from the Fed, this could create a wave of pressure in equity markets.
Thus, robust employment data could support dollar buying. Meanwhile, the S&P 500's failure to rise above its 50-day average could increase pressure on equities.
A weak NFP, on the other hand, could put pressure on the dollar and support buying shares. In this case, the dollar could quickly reverse to a decline, recapturing the local overbought conditions created by sustained buying since the beginning of September.