Asia Day Ahead: VIX back at year-to-date low, Nikkei 225 highest in two months

Market Recap

A significantly stronger-than-expected US August retail sales (0.6% month-on-month versus 0.2% forecast), along with firm expectations for a rate hold from the Federal Reserve (Fed) next week, fed into some soft landing hopes overnight. Major US indices registered a new one-week high, while the VIX heads back to retest its year-to-date low as a reflection of risk-on sentiments.

The improved risk mood came despite a hotter-than-expected read in US headline Producer Price Index (PPI), largely as continued moderation in both the core producer and consumer prices still warrants room for the Fed to consider a prolonged rate hold through the rest of the year. The US dollar firmed 0.7%, with gains partly amplified further by euro weakness.

Oil prices continued its climb (+2%), with lingering tighter-supplies conditions overriding US dollar strength. Despite a surprise build in US crude inventories this week, the broader trend over the past month is still on significant supplies drawdowns. Gold prices attempt to stabilise as well (-0.1%), but more conviction for buyers remains to be sought with its lower-highs-lower-lows formation in place since May this year.

Aside, the S&P 500 index is currently making an attempt to retest its early-September high, well-guided lately by the lower edge of its Ichimoku cloud support on its daily chart. A series of support line remains on watch as well, which includes its 100-day moving average (MA). Further upside may leave its July 2023 peak at the 4,600 level on watch for a retest next, overcoming this level could potentially leave its all-time high in sight at the 4,812 level back in January 2022.

Asia Open

Asian stocks look set for a positive open, with Japan 225 +0.88%, ASX+1.67% and KOSPI +0.90% at the time of writing. Ahead, focus will be on a series of economic data out of China (fixed asset investment, retail sales, industrial production), where the data will provide fresh updates on growth conditions, given the series of supportive policy measures so far.

Earlier today, the People's Bank of China (PBoC) kept its one-year medium-term lending facilities (MLF) rate unchanged at 2.5%, but announced a 191 billion yuan injection to boost liquidity. This follows after the China’s central bank cut its banks’ reserve requirements yesterday, with the series of supportive moves suggesting that today’s data release may potentially stay downbeat, in line with the broad downside surprises seen over the past months. Nevertheless, investors will remain on the lookout for growth conditions to reflect any worst-is-over as an indication of policy success, before finding the conviction for a further move back into Chinese equities.

After a short blip early this month, the Nikkei 225 index is back on the rise once more, finding support off the lower edge of its Ichimoku cloud on the daily chart to trigger a break above a near-term descending channel consolidation pattern. A broader bullish flag formation remains in place for now, which may leave its year-to-date high at the 34,000 level on watch for a retest ahead. On the downside, the upper channel trendline may now serve as a resistance-turned-support at the 32,800 level.

On the watchlist: EUR/USD back to retest June 2023 low

In line with an upward revision in inflation forecasts for 2023 and 2024, the European Central Bank (ECB) delivered a 25 basis-point (bp) hike in yesterday’s meeting. But the market takeaway is that of a dovish hike, as focus revolves around the central bank’s guidance that the current hiking cycle may have likely come to an end. The official statement guided that current key ECB interest rates have reached levels that will contribute substantially for inflation to return to target, if maintained for a sufficiently long duration.

With that, the EUR/USD reacted strongly to the downside overnight (-0.7%), with its June 2023 low under threat of a breakdown. Its daily relative strength index (RSI) has been below its key 50 level since July this year, reflecting sellers largely in control. Further downside may leave its year-to-date low at the 1.051 level on watch as the next line of support to hold, failing which may pave the way to retest the 1.030 level next.

Thursday: DJIA +0.96%; S&P 500 +0.84%; Nasdaq +0.81%, DAX +0.97%, FTSE +1.95%