Another strong showing in Wall Street: DJIA, Hang Seng Index, EUR/JPY

Market Recap

Major US indices delivered another strong showing overnight (DJIA +0.61%; S&P 500 +1.10%; Nasdaq +1.76%), with growth stocks in the likes of mega cap taking leadership once more. Energy stocks also outperformed overnight (XLE +3.2%), potentially reflecting some market positioning for the release of another quarter of stellar earnings. With that, the Energy Select Sector SPDR Fund is just 1.8% away from delivering a new eight-year high. For the earnings season so far, 25% of S&P 500 companies have released their results and 70% of them have outperformed earnings expectations. Beaten-down market expectations heading into the earnings season seem to have provided a low watermark for outperformance. The S&P 500 is now attempting a bullish crossover between its 50-day and 200-day moving average (MA) for the first time since March last year. For the DJIA, it remains locked in a phase of consolidation since November last year, with a retest of key resistance at the 34,400 level on close watch ahead. Any break above the current consolidation zone may provide conviction of more upside ahead.

The release of stronger-than-expected economic data was initially met with a lacklustre reaction, but equity bulls ultimately retained control into the second half of the trading session. Outperformance in US fourth quarter (4Q) GDP (2.9% versus 2.6% forecast) and US durable goods (5.6% versus 2.5% forecast) points to a more resilient US economy, but pockets of a challenging economic outlook were still presented in the much lower-than-expected consumer spending (2.1% versus 2.9% expected) and falling imports. That may still question the sustainability of recent strength over coming quarters. Recent layoffs in tech companies have also not been showing up in US initial jobless claims thus far, so economic resilience is the near-term takeaway here. Up ahead, the US core PCE price index will be in focus, with current forecast of 4.4% pointing to another moderation of pricing pressures.

Asia Open

Asian stocks look set for a flat to a higher open, with Nikkei -0.09%, ASX +0.33% and KOSPI +0.56% at the time of writing. The Australian market is back online after its holiday break yesterday, while mainland China remains closed until Monday. Nevertheless, signs of positive catch-up performance were presented in the 2.4% surge in Hang Seng Index yesterday. The Nasdaq Golden Dragon China Index closed 3.6% overnight, providing a positive backdrop for the bullish momentum to continue. Based on yesterday’s closing for the Hang Seng Index, a bullish crossover between its 50-day and 200-day MA has been formed for the first time since August 2021. The index remains guided by a rising wedge pattern for now, with the 22,870 level serving as the next line of resistance to overcome. Technical conditions in overbought territory may still call for a buy-on-retracement as the lower-risk trade.

The economic calendar this morning revealed higher-than-expected reading for Tokyo core consumer price index (4.3% versus 4.2% consensus), pulling further ahead of the Bank of Japan (BoJ)’s 2% target. This seeks to challenge an eventual policy shift for the central bank, although the government’s energy subsidies next month could be tapped on to push back any changes for now. Nevertheless, the JPY found some strength in the higher-than-expected pricing pressures, with USD/JPY (大口） still hovering below a key channel trendline resistance at the 130.80 level.

On the watchlist: EUR/JPY facing key test of resistance at upper channel trendline

The EUR/JPY pair has been trading on lower highs and lower lows since October last year, guided by a falling channel pattern to bring about an overall downward bias. Recent up-move has brought the pair to retest a confluence of resistance at the 141.59 level, which was brought on by the upper channel trendline in coincidence with its 50-day MA. Failure to overcome the level could leave the falling channel intact and potentially prompt a move towards the 139.24 level, where a Fibonacci confluence zone resides. The upside surprise in Tokyo’s core CPI has fuelled some expectations for a hawkish policy shift from the BoJ ahead, which translates to a strong showing for JPY this morning. However, that will have to pit against a more risk-on environment being supportive of the EUR. Any break of the upper channel resistance will leave the 142.68 level on watch.

Thursday: DJIA +0.61%; S&P 500 +1.10%; Nasdaq +1.76%, DAX +0.34%, FTSE +0.21%