Asian Indices Near-term Outlook: What’s Next

Overview

With the S&P 500 ending at fresh record high overnight, the Asian session largely saw a sea of green today at the time of writing as well, with NIkkei +1.65%, ASX +0.88% and KOSPI +0.17%. The exception revolves around Chinese equities, as market participants failed to find much conviction for further risk-taking, given the lack of clarity over the fiscal policy front. Corporate earnings should continue to lead the way for risk sentiments this week, while market participants may also side-eye economic data releases, such as the US retail sales, for further validation of soft-landing hopes.

Here’s our view on where the various Asian indices could be headed:

Nikkei 225: Weaker yen narrative offering support

Japanese authorities have recently thrown their support behind a more gradual pace of policy normalisation, which help to tame aggressive rate hike expectations and saw the Japanese yen ease against the US dollar to its weakest level in two months. A softer yen has been generally supportive of the Nikkei by offering a boost to the country exporters’ overseas earnings when converted into domestic terms.

We believe there may be room in the near term for the yen to weaken further, based on expectations for the Bank of Japan (BoJ) to keep policy settings on hold in the 31 October meeting, while policymakers may likely refrain from committing to any rate move before the US election. Still-weak household spending data remains a source of reservation for policymakers as well, which may translate to an ongoing lack of clarity around the timeline for the next hike and that may underpin the Japanese yen in the near term.

On the technical front, the series of higher lows have kept the Nikkei on a broader upward trend, with buyers potentially seeking to head for the 41,150 - 41,670 range next. Its daily relative strength index (RSI) has managed to defend its mid-line in late-September, while its daily moving average convergence/divergence (MACD) has also crossed into positive territory. Buy-on-dips remain the preferred strategy, with any retracement towards the 38,370 (its 200-day moving average (MA)) offering an opportunity to load up on longs.

Hang Seng Index: Lack of specifics around fiscal policies likely to drag for longer

Market participants continue to seek for clarity around fiscal stimulus support from Chinese authorities, but the lack of commitment remains a source of reservation for risk-taking in Chinese equities. But at least, the early-October sell-off has taken a pause lately, as markets remain in wait-and-see mode for more policy clarity.

We believe any policy commitment will not come until after the US elections, as the next US president will hold the key in determining trade relations with China. Any commitment now may be premature, so the continued lack of policy clarity may lead to a prolonged near-term consolidation in the Hang Seng Index (HSI), while economic data has yet to reflect any form of policy success from its late-September policy boost.

On the technical front, a consolidation range between 20,400 - 21,600 may likely be in place, before a greater reaction in prices to the US election outcome in early-November. Longer-term, the worst could potentially be over, as the index punched above its weekly Ichimoku Cloud resistance for the first time since November 2020, alongside various MAs, which offer hopes for a trend reversal to the upside.

Straits Times Index: Resilience still the story

As the Federal Reserve (Fed)’s rate cuts remain on the horizon, the dividend yield for the Straits Times Index (STI)’s constituents continue to shine, with the heavyweight banks and REITs holding up. Recent retracement has been narrow, which suggests strong traction from buyers, while near-term technical conditions moderate to more neutral levels and offer somewhat of a technical reset.

An added tailwind may come from policymakers’ aim to boost the country’s appeal for companies’ listing. While more clarity awaits, a potential increase in quality listings and a broadening of market liquidity may help companies realise their value amid their trailing valuation and raise traction among international investors.

A gap up in today’s session seem to suggest buyers eyeing for a retest of its September high at the 3,650 level, with any breakout likely to leave its record high at the 3,900 level in sight next. Any retracement may leave the 3,500 level on watch for the formation of any higher low, as the broader trend remains on the upside.