Asia Day Ahead: Risk sentiments unwind, US dollar defended support

Market Recap

Wall Street started the new year on the backfoot (DJIA +0.07%; S&P 500 -0.57%; Nasdaq -1.63%), reacting to a rise in US Treasury yields and a bounce in the US dollar on concerns that aggressive dovish expectations may be challenged ahead. The US 10-year Treasury yields briefly head above the 4% level, while the two-year yields were up 8 basis point (bp), with higher yields translating to a greater drag on the rate-sensitive Nasdaq overnight.

Having outperformed for the bulk of 2023 with the Artificial intelligence (AI) boom and surge in ‘Magnificent Seven’ stocks, one may argue that profit-taking for the growth sectors may be due, as sentiments attempt to moderate from its extreme bullish state. That said, the trend in economic data thus far could still warrant any sell-off as merely a retracement within a broader upward trend.

Ahead, markets continue to sit on expectations for six rate cuts from the Federal Reserve (Fed) through 2024, and a series of economic releases will be on watch to provide the much-needed validation for such pricing. A Goldilocks scenario will be what markets are looking for, with more lukewarm economic conditions preferred to support hopes of a soft landing, but not too overblown so as to reignite views for a high-for-longer rate outlook.

Today will bring focus to the US Institute for Supply Management (ISM) manufacturing purchasing managers' index (PMI), which is projected to turn in a lesser contraction from November (47.1 versus previous 46.7). We will also have the Fed minutes, which may clarify if Fed policymakers share the same extent of dovishness as what markets were pricing for.

The US dollar has managed to find a bounce off the upper range of its support zone at the 100.50 level, with a bullish divergence formed on its daily moving average convergence/divergence (MACD) reflecting easing downside momentum in the near term. The 99.20-100.50 range will remain a key support zone for buyers to defend while on further upside, the US dollar may face a test of resistance at the 103.80 level, where its daily Ichimoku cloud zone resides.

Asia Open

Asian stocks look set for a negative open, with ASX -1.05%, NZX -0.79% and KOSPI -2.04% at the time of writing. Japan markets remain off for holiday and will resume trading tomorrow. Overall sentiments in the region have largely tracked the downbeat handover in Wall Street, with some unwinding in place on higher Treasury yields and a firmer US dollar. The Nasdaq Golden Dragon China was down 3.5% overnight as well, caving in to the moderation in global risk environment from its current extreme bullishness.

Earlier PMI releases out of China have not been encouraging for Chinese equities, with the Hang Seng Index (HSI) struggling to see much pick-up to start the new year. A broad descending wedge pattern remains intact since January 2023, with the lower highs and lower lows putting a prevailing downward bias in place. It seems that a series of resistance may have to be overcome to provide conviction for a trend reversal to the upside, which will include its Ichimoku cloud resistance on the daily chart, along with the upper wedge trendline.

Ahead, the economic calendar ahead will leave manufacturing PMI figures out from India and Singapore on watch, which is expected to see economic conditions hold up for December. However, much focus will remain on the economic data out of the US, alongside the Fed minutes, to provide cues on the Fed’s policy outlook.

On the watchlist: EUR/USD forms near-term bearish MACD divergence

The start of the new year saw a bounce in the US dollar (+0.68%) overnight as the index attempts to moderate from oversold technical conditions, while the US 10-year Treasury yields briefly head above the 4% level on some unwinding in dovish expectations. With that, the EUR/USD was forced to a one-week low (-0.92%), with its daily MACD displaying a bearish divergence as a sign of ebbing upward momentum for now.

Ahead, the 1.093 level may be on watch, with any failure for the support line to hold potentially unlocking a move towards the 1.073 level next. The 1.073 level is where the lower edge of its Ichimoku cloud support on the daily chart stands alongside its 100-day moving average (MA), which serves as a key support confluence to hold.

Tuesday: DJIA +0.07%; S&P 500 -0.57%; Nasdaq -1.63%, DAX +0.11%, FTSE -0.15%