Asia Day Ahead: Positive messaging from China’s CEWC, ASX nears trendline support

Still hopes for a year-end rally

The higher-than-expected US producer price index (PPI) and weaker-than-expected jobless claims data release overnight seems to breed some caution in Wall Street, as the data may reflect signs of a stagflationary scenario. Of course, much still need to be seen to make a trend, but market participants took the chance to unwind, with their defensive stance reflected in consumer staples sector being the only sector in the green.

There may be little reason to panic yet however, as the rise in pricing pressures in US producer prices was not broad-based, while easing services prices may still be aligned with the Federal Reserve (Fed)'s disinflationary narrative. The Fed’s focus tends to be on consumer prices as well, as a more direct measure of cost of living, which saw pricing pressures staying in line with expectations this week. Hopes of a year-end rally could still be in place, with seasonal patterns suggesting a more subdued first half of December followed by a stronger finish into the second half.

Asia open

The Asian session took a dip lower in today’s opening, with the Nikkei -0.86%, ASX -0.59% and the KOSPI -0.07%. The economic calendar is relatively quiet in the region, apart from the release of the Japan’s Tankan Index, which did little in influencing rate bets for the Bank of Japan (BoJ)'s meeting next week. The meeting remains a “live” one, with conditions ripe for further rate increase, but the debate may be around whether we will get a hawkish hold or a dovish hike from policymakers next week. You may read more about our preview here: https://www.ig.com/sg/news-and-trade-ideas/bank-of-japan--boj--preview--timing-of-next-hike-split-between-d-241212.

Stabilising US futures this morning could see risk sentiments on a calmer footing after its initial dip, but the recent strength in the US dollar may remain a key overhang for stronger gains, which we may not expect too much of a move ahead of the Fed meeting next week. The Japanese yen has weakened to its two-week low against the US dollar, but we will be watching for a series of key resistance ahead.

Thus far, the pair has been trading in a near-term upward channel, recently finding support off its lower channel trendline. Technical conditions remain mixed however, with a series of resistance still on watch ahead from various trendlines and its 200-day moving average (MA). Immediate resistance to overcome may be at the 153.40 level, followed by its November 2024 high at the 156.67 level.

More positive messaging from China’s Central Economic Work Conference (CEWC)

Market participants have also been eyeing the China’s CEWC for more clues on upcoming stimulus plans but it seems that Chinese policymakers have kept up with their dovish messaging, mostly mirroring the script from its Politburo meeting earlier. More government borrowing, tolerance for a larger fiscal deficit and more monetary easing into next year have been the takeaways, but policy specifics remain lacking for now, which may still limit market gains.

Chinese authorities have been stuck in a more reactionary policy mode, as the uncertainty of US tariff plans makes it difficult for policymakers to make any commitment just yet. The cloudy policy settings could last into March next year, but for now, market participants have been more wary in loading up longs, having seen previous instances of fizzling rallies in April 2024 and September 2024. There may still be room for positive surprises, but much will lie in any upcoming policy specifics.

Technical analysis: ASX 200 at near-term trendline support

Having retraced close to 3% from a broad upper channel trendline, the ASX 200 is now nearing a near-term upward trendline support at the 8,245 level, which may raise hopes for the formation of a higher low. Risk-reward may favour the bulls at this level, but of course, any breakdown of the trendline support could suggest a wider retracement in the index potentially towards the lower channel trendline at the 8,045 level. Any bounce off this level could see buyers eye for another move towards its recent high at the 8,500 level, in line with the broader upward trend thus far.