ISM services stifle stock rout, AUD/USD reverses ahead of RBA

The bearish volatility seen in Monday’s Asian session continued through to the European and US sessions, although it was a game of two halves with few winners. Wall Street indices extended Friday’s post-NFP losses, seeing the Nasdaq fall as much as -6% ahead of the US open, while the S&P 500 was -4.3% lower before partial rebounds took place in the later session.

ISM services surprised to the upside at 51.1 compared with 46.4 expected and 46.1 prior. This was not part of the bearish script, with bears being ‘caught short’ on the US recession theme following last week’s weak NFP and ISM manufacturing reports. New orders and employment for ISM services also expanded (above 50) and prices paid expanded at a faster rate.

There has been speculation that the Fed may be forced into an emergency rate cut, and money markets applied a 60% probability of it occurring by next week. I’m not buying into this scenario myself and suspect markets are pricing in cuts too aggressively.

Nikkei 225 futures fell an impressive -12.7% during its worst day since the GFC, although they have since managed to recover 5.9% ahead of the Tokyo open. The moves can likely be attributed to short covering and general risk aversion as opposed to appetite for risk returning.

While gold managed to hold up throughout the European session, the general panic and need to nurse losses forced gold bulls to liquidate and send the metal -4% lower before its partial recovery managed to close just -1.3% down for the day. Silver traded briefly below $27 and copper futures are now meandering around $4 after a short spell beneath the key support level.

So what can we expect from today? Investors are likely to remain on edge and paves the way for fickle price action and potentially corrective behaviour. But it is difficult to construct a bullish scenario today on the ISM figure alone. But it could be enough to shake out some more bears and provide a tailwind for Asian indices.

Events in focus (AEDT):

The RBA releases their quarterly SOMP (Statement on Monetary Policy) which includes updated forecasts. In May they noted that “inflation remains high and is falling more gradually than previously thought” and that “the labour market is expected to ease further”. While unemployment has ticked higher to 4.1%, job figures remain decent overall, and unemployment is still not high by historical standards. Inflation, however, did come in lower than expected. It may still be too high for the RBA’s liking, but I see no case for a rate hike. And the RBA would face quite some criticism for hiking unexpectedly amid such market turbulence.

That said, they’ll likely retain their hawkish bias, even if few take it seriously. And that means if there is to be a surprise at all today, it might come in the form of a lower CPI forecast. I just doubt that will happen. For reference, the RBA currently expects inflation to reach their 2-3% target by H2 2025.

• 09:30 – JP household spending
• 11:30 – AU building approvals
• 14:30 – RBA interest rate decision
• 16:00 – German factory orders
• 00:30 – US Atlanta Fed GDPnow

AUD/USD technical analysis:

The daily high-to-low range on AUD/USD yesterday was its highest since December 2022 at 2.7%. Yet it closed the day just -0.2% lower after briefly trading beneath the April low. AUD/USD is clearly not ready to hold below 64c yet, let along the April low. And if APAC indices manage to capitalise on their early rebounds and the RBA retain their hawkish tone, we could see a higher AUD/USD by the end of the day. However, take note of resistance around 0.6550/58, with a high-volume node (HVN) and weekly R1 pivot in the area. This is also near the upper 1-day implied volatility band.

ASX 200 futures (SPI 200) technical analysis:

If the 6% rise on Nikkei futures is anything to go by, the ASX 200 could also be in for a bounce today. A bullish divergence formed on the 1-hour RSI (14) at the overnight low which marked a false break of the April low (7501). Prices are trying to form a base above the weekly S3 pivot (7529), so any low volatility dips towards 7500 could appeal to bulls for a move towards 7680, just below the weekly S2 pivot.

Nikkei futures also formed a bullish divergence on the 1-hour chart, which show the potential to at least retest 34k or close the gap at 34,800.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge