Asia Day Ahead: China’s PMI disappoints, while speculations brew for potential policy tweak from BoJ

Market Recap

Major US indices started the week on a positive note (DJIA +1.58%; S&P 500 +1.20%; Nasdaq +1.16%) as an attempt to unwind from near-term extreme bearish sentiments, although there are still some reservations in place going into the Federal Open Market Committee (FOMC) meeting this week. The VIX is down more than 7%, reversing back below its key 20 level.

Lower oil prices overnight may offer some breathing room for risk sentiments, seemingly reflecting some expectations that the Israel-Hamas conflict may still be contained within the Gaza strip, at least for now. If the conflict were to expand into the wider Middle East, the World Bank forecasts that oil prices may reach a range of $93-$157 a barrel – subdued reaction in oil prices to this suggests that doubts remain on a wider conflict.

US Treasury yields were slightly higher, with the US 10-year yields up 6 basis-points (bp) to 4.892%. There was not much of a trigger, apart from some positioning for a potential hawkish messaging from the Federal Reserve (Fed) this week. Perhaps with China’s Purchasing Managers' Index (PMI) figures out today, one to watch copper prices. Prices have been consolidating lately, with recent attempt to break above the upper resistance failing to find a breakthrough. On the downside, the US$7,885 per tonne level may be a crucial support to hold, failing which could pave the way towards the US$7,515 per tonne level next.

Asia Open

Asian stocks look set for a mixed open, with Nikkei -0.19%, ASX +0.45% and KOSPI -0.71% at the time of writing. China’s October official PMI figures continue to point towards subdued growth conditions, with manufacturing activities reversing back into contractionary territory while the services PMI came in at its lowest level since December 2022. The data may dent hopes of a more sustained recovery, given previous upside surprise in September’s numbers, and likely add to calls for more policy support to support the economy.

Ahead, eyes will also be on the Bank of Japan (BoJ) meeting, at a time where the USD/JPY failed to cross the key psychological 150.00 level lately – a previous level of intervention back in October 2022. Its daily Relative Strength Index (RSI) is also ticking below the key 50 level, seemingly reflecting some positioning for a potential policy tweak from the central bank, particularly for its yield curve control (YCC) policy. This comes as Japanese 10-year government bond yields delivered another jump overnight to a fresh decade high to 0.94%, inching closer to the 1% upper ceiling laid out by the BoJ previously.

Any tweak to the upper limit (eg. raising it to the 1.5% level) could trigger a sharp retreat in the USD/JPY, although one may note that downside reaction to the previous YCC tweak has been short-lived. Near-term support to watch for the pair may potentially be at the 147.40 – a level where dip-buying was seen back in 3 October 2023. On the upside, the 150.00 level will serve as resistance to overcome.

On the watchlist: EUR/USD’s recovery attempt continues

The EUR/USD continues to hang above its 1.051 level of support, seemingly trading within a rising channel pattern lately as an attempt to recover from its 7% sell-off since July this year. Economic data to start the week brought a stronger-than-expected 3Q flash gross domestic product (GDP) out from Germany, while inflation has also moderated quicker than expected. Oil prices are also struggling to move higher, which provides some breathing room for the pair.

Any breakout of the prevailing channel will be key. If the 1.051 level failed to hold, recent recovery could be a bearish flag formation, which presents a continuation of its downward trend. On the upside, greater conviction for longer-term bulls may have to come from a move back above the 1.080 level, where its Ichimoku cloud resistance on the daily chart is overcome.

Monday: DJIA +1.58%; S&P 500 +1.20%; Nasdaq +1.16%, DAX +0.20%, FTSE +0.50%