Asia Day Ahead: ASX 200 defended trendline support, HSI on near two-month low

Asia Open

The Asian session looks set for a slight drift higher in today’s session, with Nikkei +0.73%%, ASX +0.25% and KOSPI +0.09%. A bounce in the second half of the US trading session managed to keep major US indices in the green overnight, which seems to reflect some optimism from dip buyers in place ahead of the upcoming US Personal Consumption Expenditures (PCE) price data release. That said, we may still expect a cautious lead-up with little appetite for risk-taking, given surprises in Canada’s and Australia’s inflation numbers this week.

The economic calendar saw higher-than-expected read from Tokyo’s consumer price index (CPI) numbers this morning, with stronger pricing pressures offering some validation that the wage-price spiral sought by the Bank of Japan (BoJ) may be in effect. The data tends to act as a precursor for the nationwide inflation, with rate expectations now placing the odds of a rate hike at the July meeting at 68%. This comes as the USD/JPY continues to test the BoJ’s resolve for intervention at the 160.70 level this morning, calling for more forceful shift in monetary policies as compared to short-lived forex (FX) intervention.

The Nikkei has staged a strong recovery lately (+3.2% this week), as traction in tech stocks drove some catch-up following recent broad indecision. A break to its two-month high may be significant, which marked a breakout of recent consolidation range. The opposite is seen in the Hang Seng Index (HSI) however, with Chinese equities breaking down to a near two-month low. Fizzling in growth momentum in May industrial profits yesterday adds to the recent run of mixed economic data, which renewed doubts on whether the April run-up in the index has been too optimistic.

Look-ahead: US Personal Consumption Expenditures (PCE) price data

With the rates market looking for two rate cuts from the Federal Reserve (Fed) by the end of this year, the price data will serve as validation for whether expectations are being overly dovish. Consensus is for both headline and core PCE data to come in at 2.6% year-on-year, which reflects some easing from the 2.7% and 2.8% in April. If it materialises, this will be the lowest reading in the core aspect since April 2021.

Month-on-month, the core PCE is expected to rise 0.1%, down from the previous 0.2% in April. Headline PCE is expected to remain flat versus the 0.3% prior.

ASX 200: Managed to find support despite hawkish Reserve Bank of Australia (RBA)

An upside surprise in Australia’s inflation numbers this week has raised the odds of an additional rate hike over the coming meetings, as rising pricing pressures for the third straight month do not offer much conviction that current rates environment is keeping inflation under control. While that triggered an initial downside reaction in the ASX 200, dip buyers were also quick to step in to defend an upward trendline support at the 7,659 level.

The view that any further action will potentially be a hike-and-done may offer some support, but regardless, we may expect rate expectations to be highly sensitive to upcoming June data around inflation and labour conditions before the next RBA meeting in 6 August.

On the downside, key support will be at the Thursday’s low of the 7,661 level, with any failure to hold suggesting an overrun of recent dip-buying and places the 7,512 level on watch next. On the upside, buyers may seek to retest the year-to-date high at the 7,914 level, leaving it as key resistance to watch.

Hang Seng Index (HSI): Broke to near two-month low

Sellers seem to weigh heavily on the HSI, with the index failing to defend a support confluence at the 17,838 level to register a near two-month low. A look at its daily relative strength index (RSI) saw that the indicator failed to cross back above the key mid-line, which puts a near-term downward bias in place. This may leave the 17,153 level on watch next, where the neckline of a previous inverse head-and-shoulder pattern may stand in coincidence with an upward trendline from its January 2024 low.

The weekly chart suggests that the index has once again found resistance at the upper edge of its weekly Ichimoku Cloud for the third occasion, which leaves the 20,000 level as a crucial level to overcome over the medium term to suggest a broader trend reversal to the upside.