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Nick Goold

Dow Jones Index

The recent surge in the 10-year Treasury yield to levels unseen since 2007, topping 5%, has alarmed financial markets and led to the Dow Jones Industrial Average turning negative for the year. This increase in yields highlights investors' mounting concerns about inflation and its potential effects on monetary policy. Furthermore, the Commerce Department's report, which revealed an unexpected 0.7% rise in October retail sales—almost double the forecasted figure—has intensified these apprehensions, suggesting prolonged elevated interest rates.

At a Washington real estate conference, Richmond Fed President Thomas Barkin added to the market's unease by expressing scepticism about demand slowdown and inflation cooling. Compounding these worries were comments by Federal Reserve Chairman Jerome Powell. While he saw no indications of current Fed policies driving the economy into a recession, he didn't dismiss the possibility of an upcoming interest rate hike, signalling the Fed's cautious stance amid an uncertain economic climate.

The stock market's reactions have been heavily influenced by the bond market's movements, particularly as the 30-year fixed mortgage rate touched the 8% mark, reminiscent of rates from the year 2000. This could further impact the housing market and overall consumer sentiment. With the Dow Jones seeming vulnerable, eyes are on the upcoming US GDP Core PCE Price Index—a key inflation gauge. The prevailing market sentiment hints at a bearish week ahead.

US30DailyOct22 chart

Resistance: 34000, 34600, 35000, 36000, 36500, 37000

Support: 33000, 32785, 32550, 31750

Nikkei 225 Index

The Nikkei, taking cues from the US equities market, recently broke its short-term uptrend, marking a worrying shift in momentum for investors. A pivotal factor weighing on Japanese equities is the uptick in long-term interest rates, which traditionally dampens enthusiasm for stocks. Notably, the 10-year Japanese government bond yield rose to 0.83%, a level not witnessed in roughly a decade, up from 0.76% just a week prior. This increasing yield landscape, echoing trends in the US, could exert further downward pressure on the Nikkei in the near future.

Adding to the concerns for the Japanese stock market is the prospective rise in labour costs. As inflation takes hold, there's an escalating call for wage hikes in line with the rising cost of living. This sentiment has a voice in Rengo, the Japanese Trade Union Confederation. The conglomerate is gearing up to push for a substantial wage increase of no less than 5% in the upcoming 2024 "shunto" negotiations, a series of annual wage talks between unions and corporations. Such a hike, if implemented, could impact corporate profits, thereby influencing equity sentiment.

Amid these developments, the currency market offers no respite. The USDJPY continues to trade within a tight band, remaining under the 150 threshold, thus failing to bolster the Nikkei as it had in the past. The Nikkei is currently under pressure and could revisit its early October lows. Consequently, a cautious approach emphasizing short-term selling seems the most prudent strategy for the week ahead.

JPN225DailyOct22 chart

Resistance: 31650, 33000, 33375, 34000

Support: 30800, 30250, 30000