Asia Day Ahead: Nikkei 225 reclaimed 40,000 level, trendline support on watch for HSI

Asia Open

The Asian session looks set for a positive open, with Nikkei +0.60%, ASX +0.25% and KOSPI +0.14% at the time of writing. After earlier indecision surrounding Wall Street, greater cues for risk sentiments were offered by Federal Reserve (Fed) Chair Jerome Powell, with his comments that the US is resuming its disinflationary trend clearly leaned dovish and left a September rate cut more likely than not.

A bearish move in the US dollar and a halt in US Treasury yields’ upside in its aftermath may keep the risk environment supportive in the Asia session. That said, US markets will be closed early today and fully closed tomorrow for Independence Day, which may slightly limit some risk-taking.

On the radar is the Japan’s Nikkei, which may extend its run above the 40,000 level, with overnight strength in tech while the Japanese yen continues to trade at a 38-year low. The move above the key psychological level is significant, with buyers likely to set their sight to retest the March 2024 high at the 41,125 level. In the near-term, an upward channel remains in place, which may trigger some slight resistance but any retracement will leave buying-on-dips as the preferred strategy.

Tesla being the overnight “turnaround” story

Above-estimate 2Q vehicle deliveries for Tesla help to drive a 10% gain in its share price overnight and despite so, there seems to be room for further catch-up in the S&P 500 big tech laggard. Year-to-date, Tesla’s share price is still down 6.9%. With most of the Magnificent Seven stocks delivering more than 20% gains year-to-date, further catch-up in Apple and Tesla may remain on the cards to support the broader risk rally.

Look-ahead: China’s Caixin services PMI

An upside surprise in the China’s Caixin manufacturing data this week helped to offset some jitters around the contraction in the official reading, but earlier gains in the Hang Seng Index (HSI) yesterday were quickly sold into, which may reflect some reservations over upcoming policy support ahead. The Caixin services Purchasing Managers' Index (PMI) is expected to come in at 53.4 versus the 54.0 prior. While it may take more to reassure markets of China’s recovery story as a whole, any upside surprise will still be much welcomed.

The HSI has retraced close to 11% since its May 2024 top, with its daily relative strength index (RSI) struggling to overcome the key 50 level for now. A crucial level to watch may be at the 17,175 level, where its 200-day moving average (MA) coincides with an upward trendline to offer a support confluence. Defending this trendline support may help to support a higher-low formation as well.