Asia Day Ahead: Countdown to FOMC meeting

Asia Open

The Asian session looks set to tread water in today’s session, with Nikkei -0.10%, ASX +0.11% and NZX -0.70% at the time of writing. The major risk event ahead with the upcoming Federal Open Market Committee (FOMC) meeting will likely drive some reluctance among market participants to commit to any major moves for now, as policy clarity from the Federal Reserve (Fed) awaits. Markets in mainland China, South Korea and Taiwan are closed for holidays as well, which could put some volume on the sidelines.

All eyes on FOMC meeting ahead

Overnight, Wall Street’s mixed performance may still reveal some appetite for risk-taking, with sector rotation towards value being eyed. That said, the recent huge swings in Fed rate probability reflect how malleable expectations can be in terms of the Fed’s rate outlook, as mixed economic data seems to provide the case for either outcome (25 basis point (bp) or 50 bp).

For now, a 50 bp Fed rate cut is the broad consensus (62% probability), but focus will likely extend way beyond how much the Fed will cut this week. If the Fed opts for a conservative 25 bp cut this time round, question will be whether the Fed will open the door for more aggressive cuts ahead. The rationale behind the cuts is key as well. In the event of a larger 50 bp cut, policymakers will walk a thin line in trying to reassure market participants that larger cuts are to bring rates back to neutral, rather than a reaction to greater economic risks.

Nikkei 225, Hang Seng Index

More dovish rate expectations have put the US dollar (-0.4%) on the backfoot, as US Treasury yields headed for a multi-month low. The US 10-year yields are at its lowest since June 2023. With the Bank of Japan (BoJ) meeting up ahead this week, that has put the US-Japan policy divergence back in the limelight as well, which saw the yen gaining some ground lately. Any dovish surprise from the Fed could further drag on the USD/JPY, which at first glance may translate to some pressures for Japan’s exporters. However, overall impact will likely be more mixed for the Nikkei, as the index has managed to form a higher low since August this year, despite the USD/JPY forming a lower low.

Aside, the Hang Seng Index (HSI) has managed to stabilise lately, despite a recent run of weaker-than-expected economic data out of China which revealed that its economic woes are far from over. While this could reflect that much bearishness has been priced currently, it will also likely have to take more in order to see a significant reversal for the index.

ASX 200 still looking for a break to record territory

Aside, the Australian Securities Exchange (ASX) continues to hang around its 1 August high, still finding the catalyst for a fresh break to record territory. A move to record will likely leave the 8,300 level on watch next, where an upward trendline resistance stands. On the downside, the 7,936 level may serve as near-term support to hold in the event of a near-term reversal. For now, buyers seem to retain control, with its daily relative strength index (RSI) trading above its mid-line, while the index hangs above several key trend indicators (moving averages (MAs), Ichimoku Cloud).