Asia Day Ahead: is the year-end rally scenario still on track for global markets?

There's still hope for a year-end rally

The higher-than-expected US producer price index (PPI) and weaker-than-expected jobless claims data released overnight appear to have sparked some caution in Wall Street, as the figures may reflect signs of a stagflationary scenario. Of course, much still needs to be seen before concluding a trend, but market participants took the chance to unwind. Their defensive stance was reflected in the consumer staples sector, which was the only one in positive territory.

There may be little reason to panic yet, however, as the rise in pricing pressures for US producer prices was not broad-based. Meanwhile, easing services prices may still align with the Federal Reserve’s (Fed’s) disinflationary narrative. The Fed tends to focus on consumer prices as a more direct measure of the cost of living, and pricing pressures stayed in line with expectations this week. Hopes for a year-end rally could still be in place, with seasonal patterns suggesting a more subdued first half of December followed by a stronger finish into the second half.

Asia open

The Asian session opened lower today, with the Nikkei down 0.86%, the ASX 200 down 0.59%, and the KOSPI down 0.07%. The economic calendar remains relatively quiet in the region, aside from the release of Japan’s Tankan Index, which did little to influence rate expectations for the Bank of Japan (BoJ) meeting next week. The meeting remains a “live” one, with conditions ripe for a further rate increase, but the debate may revolve around whether we will see a hawkish hold or a dovish hike.

You may read more about our preview here.

Focus on US dollar strength

Stabilising US futures this morning could restore some calm to risk sentiment after the initial dip, but the recent strength in the US dollar may remain a key overhang on stronger gains. With the Federal Reserve meeting next week, traders may hold off on making significant moves until further clarity emerges.

Japanese yen at a two-week low

The Japanese yen has weakened to a two-week low against the US dollar, but a series of key resistance levels lie ahead. Thus far, the pair has been trading within a near-term upward channel, recently finding support at its lower channel trendline. Technical conditions remain mixed, however, with several resistance levels still on watch, including various trendlines and its 200-day moving average (MA). The immediate resistance level to overcome may be at 153.40, followed by its November 2024 high at 156.67.

USD/JYP daily chart

More positive messaging from CEWC

Market participants have been eyeing China’s Central Economic Work Conference (CEWC) for more clues on upcoming stimulus plans, and Chinese policymakers have maintained their dovish messaging, largely echoing the script from their earlier Politburo meeting. More government borrowing, tolerance for a larger fiscal deficit, and increased monetary easing into next year have been the key takeaways. However, policy specifics remain lacking at this stage, which may still limit market gains.

Chinese authorities seem to be in a more reactionary mode, as uncertainty around US tariff plans makes it challenging for policymakers to commit to any firm course of action. The unclear policy settings could persist into March next year. Until then, market participants remain cautious in increasing their long positions, given previous instances of fizzling rallies in April 2024 and September 2024. While there may be room for positive surprises, much will depend on upcoming policy specifics.

ASX 200 technical analysis

After retracing close to 3% from a broad upper channel trendline, the ASX 200 is now nearing a near-term upward trendline support at the 8245 level. This proximity may raise hopes for the formation of a higher low. Risk-reward may favour the bulls at this point; however, any breakdown of the trendline support could suggest a wider retracement, potentially towards the lower channel trendline at the 8045 level.

Any bounce off this near-term support could see buyers eye another move towards the recent high at the 8,500 level, in line with the broader upward trend observed thus far.

ASX 200 daily chart