Asia Day Ahead: Bounce in big tech lifts sentiments, Japan’s inflation provides BoJ room for patience

Market Recap

Wall Street ended the day higher with much credits to strength in big tech stocks, as the Nasdaq 100 index pushed to yet another new record high. A positive guidance from the Taiwan Semiconductor Manufacturing Company Limited (TSMC) on artificial intelligence (AI) demand outlook set the stage for a stellar bounce in semiconductors, while Apple defended its key 200-day moving average (MA) to jump 3.3% overnight - its best day since May 2023.

Further Federal Reserve (Fed) rate guidance saw Atlanta Fed Raphael Bostic saying that he expects rate cuts to take place only in the third quarter of this year, but him pulling forward his timeline from the initial fourth quarter expected came with a shade of dovishness that was very much cheered. US two-year Treasury yields were broadly flat, while the 10-year yields edged slightly higher by 4 basis point (bp). The US dollar continues to hang just below its 200-day MA, proving the trendline as a key immediate resistance to overcome.

Ahead, the US consumer sentiment data will be on watch, with expectations for a more stable read (70 versus previous 69.7) from December – resilient but not too overblown. A brief look at the Russell 2000 revealed the index retracing back to a 38.2% Fibonacci retracement at around the 1,900 level. Buyers may seek to defend this level, with any failure for the level to hold potentially leaving the 1,860 level on watch, where the next support confluence stands with the lower edge of its daily Ichimoku cloud, alongside its 200-day MA.

Asia Open

Asian stocks look set for a positive open, with Nikkei +1.35%, ASX +0.87% and KOSPI +1.05% at the time of writing, as the bounce in big tech overnight paves the way for risk-on sentiments to reignite. The Nikkei continues to hover around its multi-decade high, flirting with the key 36,000 level in today’s session which will serve as immediate resistance to reclaim. The Hang Seng Index (HSI) may attempt to stabilise after its 6% sell-off this week, but broad sentiments may remain subdued.

This morning’s economic calendar saw further easing in Japan’s December inflation to its lowest level since June 2022, which gives the Bank of Japan (BoJ) room to exercise more patience and to stand pat on policies at the upcoming meeting. The positive wage-inflation and sustainable 2% inflation conditions for a BoJ policy pivot are still largely on the lookout. The BoJ Governor Kazuo Ueda did acknowledge last month that prices and wages appeared to be moving in the right direction, but he mentioned that conditions remained uncertain, seemingly calling for more time to assess that the pricing and wage trend will stick.

Widening US-Japan bond yield differentials have driven a recovery in the USD/JPY lately, with the pair reversing back above its Ichimoku cloud on the daily chart while its daily relative strength index (RSI) reclaimed its 50 level for the first time since November 2023. Further upmove could leave the 150.00 level of resistance on watch, where the BoJ has intervened in October 2022 with aggressive yen-buying. On the downside, the 146.50 level may serve as immediate support to hold, where the upper edge of the cloud stands.

On the watchlist: GBP/JPY looking for a retest of its November 2023 high

The GBP/JPY has managed to find support off the 179.20 level lately, where a 23.6% Fibonacci retracement stands from its September 2022 bottom to November 2023 top. A reaffirmation for a high-for-longer rate outlook from the Bank of England (BoE), along with broad expectations for further dovish hold from the BoJ, has kept the pair on its upward trend on higher lows, with the pair seemingly setting its sight to retest the 188.73 level – its previous eight-year high. Any break to a new multi-year high may leave the 195.30 level on watch next, with its weekly RSI still defending the key 50 level for now.

Thursday: DJIA +0.54%; S&P 500 +0.88%; Nasdaq +1.35%, DAX +0.83%, FTSE +0.17%