Asia Day Ahead: Nikkei falters, HSI on watch

Asia Open

The Asian session looks set for a downbeat start, with Nikkei -1.55%, ASX +0.23% and KOSPI -0.92%.

The downside surprises in US consumer price index (CPI) data last night seemed to match the “good data” that the US Federal Reserve (Fed) was looking for, which further anchored the case for a September rate cut. Market rate expectations are now looking at a 85% probability for a 25 basis point (bp) cut in September, up from the 70% prior to the data release.

Amid the fuelling of dovish rate bets, US Treasury yields and the US dollar have reacted to the downside as expected, but the surprise may come from the unwinding in US tech overnight. It does seem more like a rotation from the outperformers to the laggards, rather than a risk-off move, with other sectors in the green and the Russell 2000 index seeing a 3.8% upmove. The VIX is fairly muted at +0.5% as well. All Magnificent Seven stocks were down by at least 2%, notably with Nvidia 5.6% in the red and Tesla down 8.4%. One to watch for any further divergence ahead to validate a growth-value rotation trend.

The weaker performance in growth sectors may put a drag on the Nikkei, just as intervention talks on the Japanese yen were revived with the outsized move in the USD/JPY in the aftermath of the US CPI data. You can refer to the IG Forex (FX) Watch for analysis on the USD/JPY. If the shift to value is intact, Chinese equities may potentially see some support, coupled with more curbs on short-selling activities lately, which offer room for prevailing bearish sentiments to unwind.

Hang Seng Index (HSI): More conviction still needed that buyers are taking control

The HSI has retraced as much as 12% from its May 2024 high, trading within a near-term downward channel over the past months. Its daily relative strength index (RSI) is back to retest the key 50 level once more, where buyers thus far has failed to find a decisive upward break above the mid-line on four previous occasions since June. Any break above the mid-line may be on watch to offer a signal of buyers taking greater control.

Further upside may also mark a break of the near-term upper channel trendline resistance. On the downside, a support confluence may be found at the 17,200 level, where an upward trendline support stands alongside the lower channel trendline support.