Asia Day Ahead: Nikkei bounces, ASX finds support from 200-day MA

Asia Open

The Asian session looks set for a recovery from Monday’s carnage, with Nikkei +9.40%, ASX +0.03% and KOSPI +4.32%. Higher-than-expected US services Purchasing Managers' Index (PMI) may offer some calm amid hard landing jitters, with the data providing more of a weaker-growth indication as opposed to one that is in line with a recession.

US services activities reverted into expansionary territory at 51.4, up from the 48.8 prior. New orders and business activities rebounded, and more importantly, services employment marked its first expansion in six months (51.1), which may aid to downplay the recent weakness in the US July non-farm payrolls. With some chatters of the recent US jobs number potentially being distorted by Hurricane Beryl, next month’s data will hold the key in determining whether the sharp weakening in labour conditions is more ingrained in US economy or is just a blip.

But for now, risk sentiments may have room to stabilise in the near-term. The VIX has jumped above 65.0 at one point, but has pared its gains through the day to close at 38.6, as market participants reassessed their pricing for growth risks, alongside some Federal Reserve (Fed) reassurances and more restrained geopolitical tensions.

How far may Asian indices recover?

Nikkei 225 sees aggressive dip buying

The Nikkei 225 has been the greatest setback for investors yesterday, closing 13.5% lower but is looking for a strong bounce in today’s session. As the dust attempts to settle, one may argue that despite multiple Fed rate cuts being priced by markets currently, the US-Japan 10-year bond yield spread is still close to 2018 high, which may still seem attractive. That may raise the question of whether we are seeing an overreaction.

For now, there has been aggressive dip-buying for the index, with a strong bounce off its 30,380 level of support, which marked its lows in October/November 2023. The 34,000 level will be an immediate resistance to overcome, given that earlier attempts to defend this level failed to materialise yesterday. More significantly, the 34,900 level will be crucial, where a key upward trendline has been broken down last week.

On the downside, failure to close above the 34,000 level in today’s session could still point to strong sellers in place, which may leave the 31,700 level on watch next.

ASX 200 defended its 200-day moving average (MA)

A close to 8% retracement in the ASX 200 has brought the index to retest its 200-day moving average (MA) yesterday, which has managed to find some support. That said, we may have to see more in calling for a bottom, given that the index has broken down below a key support confluence last week, where an upward trendline support stands alongside its daily Ichimoku Cloud. Its daily relative strength index (RSI) has also dipped below its mid-line, which leaves sellers in broader control.

Yesterday’s low at the 7,523 level will be a key immediate support for buyers to defend, failing which may unlock fresh selling pressures towards the 7,288 level next. On the upside, the 7,745 level will be key resistance to overcome.