Asia Day Ahead: Bank of Japan meeting in focus, Nikkei 225 on watch

Asia Open

The Asian session looks set for a weak start, with Nikkei -1.14%, ASX +0.26% and KOSPI -0.15%. This follows after a mixed handover in Wall Street, which saw further unwinding in big tech as sky-high earnings expectations are met with some doubts. That said, market appetite for risk-taking was still in place, with traction towards more value-focused sectors signalling a rotation rather than a reversal. Seven out of 11 S&P 500 sectors closed in the green overnight, while the DJIA and Russell 2000 edged higher.

Risk sentiments across the region may react first-hand to Microsoft’s after-market earnings. It is a strong set of result with better-than-expected top and bottom-line numbers, but markets were eager to see a stronger growth in its cloud division. Management guidance for Azure growth to accelerate in the second half of FY2025 may calm some nerves however, by dispelling concerns of peaking growth momentum in the segment and that its previous stance of customer demand outpacing supply still stands. One to watch for any dip-buying around the immediate support level of US$400.

We may expect sentiments across the region to remain soft for now as several high-risk events ahead may limit some risk-taking, ranging from more US big tech earnings to the upcoming Bank of Japan (BoJ) and Federal Open Market Committee (FOMC) meeting. US Treasury yields continue to dip to their multi-month lows, alongside lower oil prices, which is generally positive for the region but traction is limited by a firmer US dollar and patience for near-term central bank policy uncertainty to clear.

Look-ahead: BoJ meeting

We have previously written a preview here: https://www.ig.com/sg/news-and-trade-ideas/bank-of-japan--boj--preview--odds-of-a-july-rate-hike-priced-at--240718 (dated 18 July). Since then, market rate expectations have leaned further towards a rate hike, which may face the risks of disappointment in the event of any inaction in interest rates.

Despite higher inflation and wages offering more confidence of a virtuous wage-price cycle in place, policymakers will face the task of balancing any policy unwinding with the slowdown in the Japanese economy, which may still leave some tints of dovishness in its guidance. Any pushback in the likes of the previous June meeting that the central bank is not heading into a monetary tightening cycle may challenge the recent hawkish expectations in place, which could see the Japanese yen paring back on recent strength while offering Japanese equities room for some near-term relief.

Trendline breakdown of Nikkei 225 on watch

A push to record high above the 42,000 level earlier this month proved to be a blip, as the Nikkei 225 index retraced as much as 12% over the past three weeks. A breakdown of an upward trendline may seem significant, which suggests sellers taking greater control and leaves a broader downward bias in place for now. Its daily moving average convergence/divergence (MACD) has dipped into negative territory while its daily relative strength index (RSI) heads below the mid-line to its lowest level since April this year.

Ahead, the 37,000 level may be on watch for some defending. Any failure to hold the level could pave the way for the index to retest the 34,000 level next. On the upside, any bounce could find resistance at the 39,600 level, which was marked with a strong down-move last week upon the trendline breakdown.