Asia Open: Risk mood sours following Wall Street cues

US growth data, renewed pandemic concerns hitting sentiments

The initial calm across major US indices was shattered last Friday as markets plunged—S&P 500 and DJIA down 1.7%, Nasdaq losing 2.2%. Market participants scrambled for explanations, attributing the selloff to a mix of weaker US growth data, rising inflation expectations, and renewed pandemic concerns following the discovery of a Covid-like bat virus in China.

US services Purchasing Managers' Index (PMI) unexpectedly contracted (49.7 vs. 53.0 est.), while the final print for the University of Michigan (UoM) consumer sentiment was revised down significantly (64.7 vs. 67.8 prior). Notably, five-year consumer inflation expectations surged to 3.5%, the highest since 1995, up from 3.2% in January. While still early to call, the data points to rising stagflation risks, which may have triggered the consistent selling throughout the US session.

There was a clear display of preferences for the defensives (consumer staples, utilities, healthcare, US Treasuries), while investors unwind positions in overvalued growth sectors, particularly the Magnificent Seven. Selling volume remains thick into the close, which may suggest some follow-through of the cautious risk tone to kickstart the new week.

But now with the initial reaction behind us, focus will likely shift to NVIDIA’s earnings this week. With stretched US tech valuations prompting capital flows to Europe and China, NVIDIA’s results will be pivotal in determining whether the Mag Seven can justify their lofty prices and stem further selling.

Asia Open

The Asia session looks set to mirror the sell-off in Wall Street at the open, with ASX down 0.23% and KOSPI down 0.55% at the time of writing. Losses may be more contained however, given the lower exposure to tech, while lower Treasury yields and a weaker US dollar may still offer something to cheer. Whether Chinese equities can maintain their resilience will be key to watch into the new week, with the Nasdaq Golden Dragon China Index seemingly insulated from the Wall Street sell-off last Friday. The index gained another 1.7%, overall suggesting that risk appetite remains intact but market participants are seeking out areas of value, where potential for returns are higher.

Amid the prevailing market weakness, a key question will be whether there are opportunities to buy the dip, given that the broader trend still leans on the upside and may favour the bulls over the medium term. An area of interest is the ASX 200, which has retraced close to 5% over the past two weeks. The index is now closing in onto a potential channel support, which offers an attractive risk-reward proposition for the buyers.

The Nikkei, on the other hand, remains locked within its broad ranging pattern. Stronger economic activities have been weighed against a hawkish Bank of Japan (BoJ) and a stronger yen, leading to a stall in momentum as indecisiveness dominates. But with the index now edging towards the lower consolidation bound, one may watch for any support to kick in at the 37,663 level, which has held up on four previous occasions since September 2024.

The Hang Seng Index (HSI) is now back at its October 2024 high, with brief pullbacks thus far reflecting strong buyers’ interest. Despite the recent rally, valuation remains reasonably priced at a price-to-earnings (P/E) of 11x, in line with its long-term average. While technical conditions signal for overbought levels, selling pressures at key horizontal resistance have been well absorbed thus far, with any prolonged consolidation at resistance likely to raise the odds for a breakout. The risk-reward for fresh buyers may still favour buying on pullbacks however, ideally with a technical reset to more neutral levels to reduce the risks of being caught in any near-term unwinding.