Asia Day Ahead: China’s mixed economic data reflects challenging environment ahead

Market Recap

A whipsaw session on Wall Street eventually saw major US indices closing in the red (DJIA -0.62%; S&P 500 -0.37%; Nasdaq -0.19%), with gains in Treasury yields and a stronger US dollar keeping risk sentiments in check. The US two-year yields gained 8 basis point (bp), while the 10-year yields crossed back above its key 4% level – a reaction to some pushback against dovish rate expectations from Federal Reserve (Fed) Governor Christopher Waller’s comments. The Fed official acknowledged rate cuts this year, but “see no reason to move as quickly or cut as rapidly as in the past”.

On the earnings front, US banks’ results were a story of divergence. Morgan Stanley's share price closed lower (-4.2%), with a disappointing guidance for its margins masking the rebound in investment banking activities, while investors took slight comfort in Goldman Sachs (+0.7%) on a more positive management’s outlook.

Ahead, US retail sales will be in focus today. Expectations are for US consumer strength to continue with a 0.4% month-on-month growth in December (0.3% in November), displaying some resilience in the year-end holiday spending. A more lukewarm figure may be what markets are hoping to get in justifying dovish rate views, with any significant upside surprise in consumer strength potentially triggering worries of high-for-longer rate, given the higher-than-expected US consumer inflation seen just last week.

The US dollar will be on watch, having pushed above its 102.30 level of resistance this week to register a one-month high and breaking above a downward trendline resistance. Its daily relative strength index (RSI) has also edged above the key 50 level for the first time since November 2023. Further upside may see the US dollar retest the 103.80 level, where a resistance confluence resides with the upper edge of its daily Ichimoku cloud and its 100-day moving average (MA).

Asia Open

Asian stocks look set for a mixed open, with Nikkei+0.55%, ASX -0.20% and KOSPI -1.59% at the time of writing. Nikkei’s rally has seemingly called for a near-term breather on overextended technical conditions, although there are no strong bearish catalysts to challenge its prevailing upward trend just yet. Chinese equities remain the underperformer, with the 16,000 level for the Hang Seng Index caving in yesterday, which unlocks a continuation of fresh selling pressures into today’s session.

Market focus will be on a series of economic data out of China and subdued growth conditions in the world’s second largest economy remain the key story once again. China’s full-year gross domestic product (GDP) at 5.2% met the authorities’ target of 5% for 2023, but 4Q read of 1% quarter-on-quarter still reflect a weak growth environment, easing from the 1.3% in 3Q.

Other economic data were more mixed as well, with fixed asset investment and industrial production coming in slightly above consensus, but retail sales disappoint. Overall, the trend of weak economic data suggests that the accommodative policy environment has yet to translate to a sustained turnaround in economic conditions, which may call for more supportive intervention by authorities in the first half of 2024.

Chinese equities struggled to see any pick-up on these numbers. The Hang Seng Index seems on the verge of breaking below the lower trendline of a descending wedge pattern, sticking to its broader downward trend. Its daily moving average convergence/divergence (MACD) continues to struggle to move back into positive territory as well. With the 16,000 level giving way, a retest of its October 2022 bottom at the 14,600 level may potentially be in sight over the coming weeks. On the upside, the 16,000 level will stand as immediate resistance to overcome.

On the watchlist: EUR/JPY edged back above daily Ichimoku cloud

Subdued wage growth data and easing Tokyo’s inflation last week have ignited fresh weakness in the Japanese yen, as the data was perceived to offer more room for the Bank of Japan (BoJ) to keep its ultra-accommodative policies for longer. Combined with European Central Bank (ECB) members sticking to their 'higher for longer' message on rates, the EUR/JPY has managed to overcome its 200-day MA and edge back above its daily Ichimoku cloud for the first time since March 2023.

A push above the 50% retracement level (from November 2023 peak to Dec 2023 low) may invalidate a potential bearish flag formation. Momentum has been positive as well, with its daily MACD heading back above the zero level. One may watch for a consistent drift higher within a near-term rising channel pattern, with a key support confluence at the 157.20 level.

Tuesday: DJIA -0.62%; S&P 500 -0.37%; Nasdaq -0.19%, DAX -0.30%, FTSE -0.48%