Asia Day Ahead: Risk-on mode prevails post-Fed, ASX at record high

Asia Open

Having digested the recent Federal Reserve (Fed) meeting, a decisive pivot to support the labour market and strong reassurances for a soft landing from policymakers have seen buyers stepping up, with the S&P 500 and DJIA scaling to fresh record highs. Strong flows are headed into tech stocks as well, with the Nasdaq up 2.5%, powered by gains in the Magnificent Seven.

It seems that bears may have a hard time standing in the way, apart from tapping on the sell-the-news narrative and weak seasonality, which are less significant amid the broader macro picture. To further put recession calls to rest, the economic calendar overnight presented another run in stronger-than-expected US economic data (jobless claims, Philly Fed Manufacturing, CB leading index).

The Asian session looks set to follow through with the risk-on environment, with Nikkei +2.11%, ASX +0.51% and KOSPI +1.05% at the time of writing. Lower rates from the Fed can support global demand for the region’s trade-orientated economies and offers more policy flexibility for Asian central banks, while a struggle in the US dollar to retain earlier gains may serve as an added tailwind as well.

The Nikkei is trading back above its 200-day moving average (MA), with buyers presented with the task of defending the trendline into the weekend. Chinese equities found room for gains lately as well, with the Hang Seng Index (HSI) up 3.7% since the start of the week. Fingers are pointing to potential stimulus hopes as the catalyst, especially as the authorities’ 5% growth target seems out of reach. However, as with past lessons, any disappointment in the scale of policy support may still eventually see gains fizzle. Policymakers have kept its loan prime rate unchanged in today’s session, reflecting their restraint in more aggressive policy support until the restructuring of the economy is done.

Attention to shift to Bank of Japan (BoJ) meeting

All eyes will now be shifted to the BoJ meeting next, with expectations fully priced for a no-change in policy this time round following a larger-than-expected rate hike in the July meeting. The BoJ Governor Kazuo Ueda may reiterate his stance that the BoJ may rate hikes further if the economy and prices perform in line with policymakers’ expectations, but may refrain from giving any hard commitments around the timeline.

Thus far, higher-than-expected Japan's inflation and wage growth have offered the BoJ more confidence that a virtuous wage-price cycle will keep inflation above 2%. Rate expectations are leaning towards another rate hike in December this year, with market participants watching for any hints from the press conference to anchor such timeline.

ASX 200 registered a new record high

The ASX has punched through the 8,617 level of resistance to hit a new record high, setting its sight on the 8,300 level on watch next, where the upward channel trendline stands. Buyers remain in control, with its daily relative strength index (RSI) trading above its mid-line, while the index hangs above several key trend indicators (moving averages, Ichimoku Cloud). On the downside, the 8,167 level will now serve as near-term support to hold.