Asia market update: HSI remains in descending wedge pattern while Nikkei eyes year-to-date high

Market Recap

Downside surprises in US October consumer price index (CPI) provided further validation that US interest rates may have peaked, which triggered risk-on sentiments across global equities. Reflecting some degree of success from tighter monetary conditions, US headline inflation were flat from a month ago, while more importantly, the core aspect of inflation rose less-than-expected at 0.2% month-on-month. The closely-watched services component rose a ‘mere’ 0.3% in October from previous 0.6%, given more measured gains in shelter costs and medical care services.

As a result, market rate expectations reacted the way they should – a dovish shift with a rate-hold scenario firmly anchored over the next three Federal Reserve (Fed) meetings. The timeline for rate cuts were also pushed forward to May 2024, versus the 2H2024 timeline priced previously, with promising inflation progress deemed to give room for more policy flexibility for the Fed. US 10-year Treasury yields fell to its seven-week low, prompting a similar down-move in the US dollar. Notably, the Nasdaq gained 2.4% overnight, while the Russell 2000 surged 5.4%.

Asia Open

Asian stocks have managed to tap on the positive handover in Wall Street for a run higher this morning, with Nikkei +1.96%, ASX +1.38%, HSI +2.44% and KOSPI +2.03% at the time of writing. Lower bond yields and a weaker US dollar have been well-received, while market participants basked in the hopes of a potential economic soft-landing without the need for additional rate tightening in US.

Risk sentiments may receive an added boost, as a series of economic data out of China this morning revealed a stronger-than-expected rebound in retail sales (7.6% year-on-year versus 7% consensus) and industrial sales (4.6% versus 4.4%). On the other hand, recovery in fixed asset investment continues to lag with a 2.9% year-on-year growth versus 3.1% expected, coming in at its lowest level since November 2020 as a reflection of still-subdued sentiments in the property sector. While that may seem promising nevertheless, market participants will still want to see more positive follow-through in the recovery over the coming months, given the lessons of short-lived growth upturns that have been witnessed over the past year.

Thus far, Chinese authorities remain supportive as well, opting to leave the one-year medium-term lending facility rate (MLF) unchanged at 2.5% today, but injected a net 600 billion yuan of fresh liquidity into the banking system. The move provides some validation that Chinese authorities continue to have their eyes on growth conditions and may continue to utilise other policy tools over the coming months.

Hang Seng Index: Descending wedge pattern in place, cloud resistance still key to overcome

The Hang Seng Index (HSI) has been trading within a descending wedge pattern since the start of the year, ever since its reopening boost failed to materialise. On the weekly chart, its relative strength index (RSI) continues to trade below the 50 level as a sign of a downward trend in place, while its weekly moving average convergence/divergence (MACD) drifts into negative territory.

Greater conviction for the bulls may have to come from a move back above its Ichimoku cloud resistance on the weekly chart, which the index has struggled to overcome ever since its breakdown in August 2021. This may warrant an upward break of the key psychological 20,000 level ahead to provide more conviction of a trend reversal ahead. For now, the 18,100 level may serve as immediate resistance to overcome to retest the upper wedge trendline resistance.

Nikkei 225 index: Setting its sight to retest its year-to-date high

The Nikkei 225 has been drifting within a falling channel pattern since June this year, but fresh signs of life have emerged with an upward break of the upper channel trendline early this month. A subsequent retest of the upper trendline last week was met with a bullish rejection, serving as validation of immediate support for the trendline to hold at around the 32,000 level. Buyers are seemingly setting their sight to retest the June 2023 high at the 34,000 level next, with a break above the 34,000 level leaving its 1990 decades-high on watch at the 38,900 level.

Tuesday: DJIA +1.43%; S&P 500 +1.91%; Nasdaq +2.37%, DAX +1.76%, FTSE +0.20%