Asia Day Ahead: What’s next for the Hang Seng Index after its 9% dip?

Asia Open

The Asian session looks set for a positive open, with Nikkei +1.15%, ASX +0.50% and NZX +0.74% at the time of writing. Korean markets are closed for holiday today. The return of risk appetite in Wall Street overnight may set a positive backdrop for Asia, as optimism continue to bask in Federal Reserve (Fed)’s policy pivot while US labour market risks are not as worrying as before, given the latest blowout US job report. The VIX dipped 5.4% overnight, while the S&P 500 continues to consolidate around previous record high in anticipation for a catalyst to induce a fresh break.

A slight tick lower in Treasury yields overnight and a pause in the US dollar rally will see market participants taking the chance to load up on risks. Overnight, US growth stocks were back at the hot-favourite seats, potentially with some anticipation for them to deliver in the upcoming earnings.

We are also seeing markets starting to fade geopolitical risks in the absence of any disruptions to supply chains, trade routes and energy supplies thus far. Market patience seems to be wearing thin in waiting for Israel’s response, while a broader ground incursion in Lebanon may have laid pressures on Hezbollah to seek a ceasefire. Safe-haven gold prices were down 0.78%, while Brent Crude prices being a barometer to geopolitical risks were down 4.5%.

Hang Seng Index down. What’s next?

Chinese stocks were the talk of the town yesterday, with the Hang Seng Index (HSI) plunging 9.4%, its largest dip since 2008. However, one may note that the index is still up 24.7% year-to-date. A lack of new stimulus has been the cause of disappointment, with many market participants hoping that its fiscal policies will follow in the footstep of the financial “bazooka” delivered in late-September, but there was clearly a step-down in yesterday’s announcement. Most measures announced are tapping on existing funding or frontloading, coupled with the usual verbal cues of meeting its gross domestic product (GDP) growth target of around 5% for this year.

We believe a pullback following a 36% rally in less than a month may be healthy in allowing market participants to reassess recent policy developments, while providing entry points for new investors and creating more balanced market participation.

Having unleashed a wave of monetary stimulus back in late-September, another commitment to a major spending package may seem overly aggressive as well, with authorities potentially hoping to gauge the success of recent measures first before assessing whether to do more. Several data suggests a jump in home sales during the holiday period, but consumer spending continues to lag, which may call for more direct support to consumers if the trend continues.

Hang Seng Index Technicals: Broader upward trend may persist

The weekly chart suggests that the HSI has reversed to an upward trend since September 2024, which leaves buying-on-dips as the preferred strategy. Its weekly relative strength index (RSI) has been managed to defend and trade above its mid-line thus far, along with a break of its weekly Ichimoku Cloud resistance for the first time since November 2020. Longer-term moving average (MA), such as the 100-day MA, is also showing signs of turning up.

With the US elections less than a month out, we may expect volatility to persist in Chinese stocks, given the uncertainties around US-China trade policies and geopolitical relations. For now, the index is retesting a 38.2% Fibonacci retracement level on the daily chart at the 21,200 level. A more attractive buy level may be at the 19,965 level or 19,632 level, where its technical conditions may hit neutral to offer a technical reset. Overall, the broader upward trend may continue, with one to watch for the formation of any higher low ahead.