Asia Day Ahead: Risk-off tone prevails while Brent crude remains supported

Market Recap

Major US indices reversed course in the latter half of the session, as the US 10-year Treasury yields flirted with yet another 13-year high at the 5% level following Federal Reserve (Fed) Chair Jerome Powell’s comments. The Fed Chair has recited his previous script that above-trend growth and strong labour conditions may call for more tightening, but gave room for further rate hold by acknowledging that surging bond yields may have helped to tighten financial conditions.

His stance has been in line with the shift in rhetoric from other Fed policymakers lately, but market sentiments have been more muted towards the impending end to the Fed’s hiking cycle, choosing to place their focus on the high-for-longer rate narrative instead.

Rising geopolitical tensions in the Middle East did not help matters as well, with signs of Israel preparing for a ground assault while a US base in Iraq was hit by drones and rockets. If anything, the events lay the ground for further conflict escalation in the Middle East, with upside risks to oil prices complicating central banks’ global inflation fight and supports monetary policies to be kept restrictive for longer.

For Brent crude prices, buyers continue to retain control with a push to a new two-week high overnight. A bullish crossover was formed on Moving Average Convergence/Divergence (MACD) on the daily chart, while prices found support from the lower edge of its Ichimoku cloud zone on previous retests. On the weekly chart, its Relative Strength Index (RSI) has also defended the key 50 level as well. Further upmove may leave the September high in sight for a retest at the US$95.00 level.

Asia Open

Asian stocks look set for a downbeat open, with Nikkei -0.91%, ASX-1.41% and KOSPI -1.90% at the time of writing – an expected reaction to the risk-off tone from Wall Street, surging long-dated Treasury yields and higher oil prices. The Hang Seng Index is back to retest its 11-month low in today’s session. Similarly, the Straits Times Index is also dragged lower by 2.8% over a span of three days, marking a new low since November 2022.

Earlier signs of policy success from better-than-expected China’s economic data have allowed authorities to keep its benchmark loan prime rate unchanged for now, which is in line with broad expectations.

Aside, the economic calendar this morning saw an upside surprise in Japan’s core inflation (2.8% versus 2.7% consensus), but given that it is the slowest rate in 13 months, the data may provide room for more wait-and-see from the Bank of Japan (BoJ) at its meeting next week. Headline inflation is back to its September 2022 level as well, with the central bank likely to stick to wanting to see more in terms of ‘sustainable inflation’ as a condition for policy shift.

The USD/JPY continues to hover just below the psychological 150.00 level, proving the level as a key resistance to overcome as market participants are concerned that a breach of the level may draw more jawboning or intervention from the authorities. Nevertheless, the pair has been trading on an ascending channel pattern since the start of the year as a reflection of an ongoing upward trend, with any decisive break of the 150.00 level likely to trigger a move to retest the 152.00 level next.

On the watchlist: EUR/GBP heads above double-bottom formation

The EUR/GBP has been displaying some resilience lately, pushing to a new five-month high above the 0.870 level of resistance. Having traded in a double-bottom formation since May this year, a push above the 0.870 level seems to mark an upward break of the neckline, reflecting buyers in greater control.

On its weekly chart, a bullish crossover was displayed on its MACD, while its RSI has defended a move above the key 50 level as a sign of an upward bias. The 0.870 level will now be an immediate support to hold, with further upmove potentially leaving the 0.882 level on watch next for a retest.

Thursday: DJIA -0.75%; S&P 500 -0.85%; Nasdaq -0.96%, DAX -0.33%, FTSE -1.17%