Asia Day Ahead: China’s blockbuster rally in focus

Asia Open

The Asian session looks set for a mixed open, with Nikkei -0.80%, ASX +0.18% and KOSPI -0.70% at the time of writing. Despite a recent blowout US jobs report which should usually breed economic optimism, we see risk sentiments in Wall Street easing off into the latter half of the session, in what tends to be a more volatile period for the year seasonally. A lack of macro data to start the new week could keep some market participants on the sidelines, while uncertainties around geopolitical risks in the Middle East, a surge in Treasury yields and a stronger US dollar may drive some reservations in the Asian session.

Mainland China markets will be back from their Golden Week holiday and a further pull-ahead from the region in a catch-up rally is likely to play out at the open. That said, the baton to determine if the blockbuster rally around Chinese equities can be sustained will be passed to the upcoming "stimulus" press conference by the National Development and Reform Commission of the People's Republic of China (NDRC). More policy support are expected to be announced, potentially around the fiscal approach to complement the recent suite of monetary support measures.

Another “bazooka-like” series of measures to potentially support consumption or investment could further amplify optimism that the worst could be over for the Chinese economy, and that authorities are adamant on hitting their 5% growth target for the year. Of course, with hopes now high for authorities to deliver, the risks of disappointment are high as well, and any unwinding of gains could quickly escalate. The possibility of near-term sell-the-news sentiments could also be on the table, given that once markets have priced for recent stimulus efforts, subsequent challenges will be for economic data to validate policy success and not to forget, the risks around US elections which could determine the scale of any trade restrictions on China.

Hang Seng Tech Index on watch

An onslaught of easing measures from China has taken Chinese equities to their highest level since February 2022, driven by a combination of short-covering activities, a valuation reset and aggressive catch-up buying from hedge funds and institutions. On the four-hour chart, the Hang Seng Tech Index has been guided nicely by a support confluence, consisting of an upward trendline and its 20-period moving average (MA), which may keep the near-term upward trend intact.

That said, we will suggest buying on dips on the basis that recent higher highs could present a bearish divergence on its relative strength index (RSI) and moving average convergence/divergence (MACD). A return in its RSI back towards its mid-point may present a more attractive point of entry for new longs, while current long positions may continue riding the trend until the trendline support confluence is broken down.