Asian stocks have kicked off August on the back foot as US-China tensions stir safe-haven demand. This follows on from US equities, that snapped a three-day win streak after capping their best month since 2020 last week. Trading volumes are typically thinner during summer as European traders especially are running flat trading books during the holiday season. This means volumes will be a fraction of the size of normal trading activity which can exacerbate price action and swings. These were certainly seen intraday yesterday as the broad S&P500 index moved between gains and losses.

Yesterday’s falls across the pond followed on from a gain of more than 9% for the blue-chip S&P500 in July and a 12.3% increase in the tech-heavy Nasdaq that marked the tech benchmark’s strongest month since April 2020. Easing expectations for interest rate rises and positive earnings updates from several big tech and energy companies were the two key drivers of this summer rally. The question on many investors’ lips has been if the low is now in place, or if this is a bear market rally in a broader downtrend?

On the technical side, the S&P500 has hit the 100-day simple moving average at 4121 in a resistance zone with the February low at 4114. The halfway point of the March to June move is also near at 4137.

Data Dependent traders

Market participants are now watching data more closely too, after Fed Chair Powell, and President Lagarde, and the ECB, bailed out of offering forward guidance to investors and markets. Probably this is an honest admission that policymakers don’t know what the economy is going to do next. Instead, they are now data dependent and yesterday’s main economic indicator painted a cloudy picture at best.

The US ISM slipped to 52.9 in July, its lowest level since June 2020. Any figure above 50 indicates an expansion, but the latest result points to a slowdown in growth.  But the ISM’s index did provide an encouraging gauge that cost pressures may be easing on companies. The sub-index fell to a near two-year low, well below the estimates of economists.

Falling bond yields take down USD/JPY

The high in USD/JPY seems a distant memory today from when it was posted in mid-July above 139. The major is correlated with US 10-year rate differentials, mainly due to the Bank of Japan’s commitment to yield curve control. This effectively means where the US 10-year Treasury yield goes, so to does USD/JPY. And those yields have fallen sharply as markets have scaled back their expectations of how much the Fed will tighten policy to curb red-hot inflation. From a high close to 3.5%, the US 10-year yield is now nearing 2.5% after dropping below the lower bound of the recent sideways trading range around 2.7%. This is a mighty fall in bond markets and has weighed heavily on USD/JPY.

The major is back below 135 and smashed down through the next major support at 131.34 overnight. The latest US wage and inflation data may slow the descent of US yields. But the yen may retain a small bid on growing odds of a US recession as the Fed hiking cycle continues. This week’s bid for safe haven assets as US House Speaker Pelosi gears up to visit Taiwan is also helping the yen. The 100-day simple moving average could offer support at 130.12 as prices go into overbought territory.