Greater direction to be presented this week: DJIA, ASX 200, USD/JPY

Market Recap

After 2022 presented the worst year for Wall Street since 2008, the start of 2023 has seen European equities attempting a move higher but that came on the back of a light-volume environment as many markets were closed for the new year holiday. Otherwise, the past two weeks of 2022 have been largely met with sideway moves, as a hawkish Federal Reserve (Fed) kept the year-end positive seasonality in check. That could change later this week, as the US Purchasing Managers' Index (PMI) data releases, Federal Open Market Committee (FOMC) minutes and December US non-farm payrolls are lined up on the economic calendar, while trading volume returns. Interest rate expectations from the Fed and the trade-off for economic growth will likely remain as the spotlight to start the year, as market expectations remain split on whether the Fed’s terminal rate will need to warrant a move above 5%. The last inflation reading for 2022 (US core PCE price index) has barely matched expectations, which prompted a move higher in US Treasury yields. Further upside in yields could continue to pressure the rate-sensitive Nasdaq and keeping the preferences for value sectors alive for now.

Ahead of the US job release, expectations are for further moderation in US job gains to 200,000 from previous 263,000. Market participants may be hoping for a slight underperformance in job gains to prompt a cooler rate hike process from the Fed, but the Fed’s clear focus on keeping inflation under check could still leave pricing data as the key driver of market moves. The upcoming earnings season could also present a challenge for risk sentiments, as a trough in corporate earnings is unlikely to be seen as yet.

After a post-Fed sell-off in mid-December, the DJIA has been largely consolidating above a key 50% Fibonacci retracement level at 32,800, while awaiting a greater catalyst to spur a clear direction. Market breath has largely moderated to more neutral levels, with the percentage of stocks above its 50-day moving average (MA) back at the 50-mark from previous overbought conditions. Any failure for the 32,800 level to hold could potentially leave the 32,000 level in sight, where a downward trendline support will be put to the test.

Asia Open

Asian stocks look set for a negative open, with ASX -1.56% and KOSPI -1.51% at the time of writing. Japan market is closed today. The preliminary data for Singapore’s quarter four (Q4) gross domestic product (GDP) stands at 2.2% year-on-year, slightly higher than the 2.1% expected. Quarter-on-quarter, growth is up 0.2%. While the slight outperformance suggests some resilience in economic activities for now, the overall trend remains on the downside with the third straight quarter of moderation, while pressure on global trade activities could persist into the first quarter. Finding a bottom in growth could be on watch in 2023, as market sentiments may be sensitive to the narrative that the worst is over, as seen by the bullish sentiments in European equities to start the year on a lesser contraction in factory output.

For the ASX 200, the first trading day of 2023 has brought about a rough start as the key 7,000 level has failed to hold in today’s session. The decline also marked a downward break of its 200-day MA, which points to a bearish bias while moving average convergence/divergence (MACD) is edging into negative territory below zero. The 6,830 level may be on watch next, which marks a previous resistance-turned-support.

On the watchlist: USD/JPY back to retest 130.80 support after short-lived bounce

The Fed hitting peak hawkishness in its rate hike process and the expected timeline for a rate hike by the Bank of Japan’s (BoJ) inching closer in the first quarter of the new year have translated to an ongoing downward trend in the USD/JPY (大口）, with the series of lower highs and lower lows presented since November 2022. Recent attempt for a bounce off the 130.80 level of support has been short-lived as gains were quick to be pared, with larger bearish candles overriding more measured attempts of dip-buying. Having been guided by a near-term descending channel pattern, a break below the 130.80 level could seem to pave the way towards the lower channel trendline at the 127.00 level next, as the policy divergence narrative between the two central banks could continue to cool in the coming months.