Asia Day Ahead: USD/JPY back at near-term resistance, oil prices surged more than 3%

Market Recap

Major US indices fell for the second straight day (DJIA -0.76%; S&P 500 -0.80%; Nasdaq -1.18%), as extreme bullish sentiments continue to unwind. After major indices locked in a stunning bounce-back in 2023, overbought technical conditions and overextended near-term breadth indicators may be driving appetite for some profit-taking into the new year, while validation for aggressive rate cuts priced through 2024 remain to be sought.

Overnight economic data continue to point to a cooling US economy, with the US Institute for Supply Management (ISM) manufacturing purchasing managers' index (PMI) contracting for the 14th straight month. The sharp decline in manufacturers’ prices (45.2 versus previous 49.9) may bode well for further easing in inflation ahead, while softer job opening numbers for November (8.79 million versus 8.85 million forecast) point to cooling labour market conditions as well. That said, there were some disappointment from the Federal Reserve (Fed) minutes, which did not offer much clues on the timeline of rate cuts while citing an “unusually elevated degree of uncertainty” on the policy path. The US non-farm payrolls report on Friday will be on watch next.

For the Nasdaq 100 index, further downside may confirm a weekly bearish divergence in place, with the weekly moving average convergence/divergence (MACD) forming lower highs on earlier index peaks. The 16,000 level may be on watch for buyers, where a period of consolidation stands in November 2023. On the broader scale, it may have to take more to reverse the prevailing upward trend, with the weekly relative strength index (RSI) trading above the 50 level, alongside various moving averages (MA).

Asia Open

Asian stocks look set for a negative open, with Nikkei -1.21%, ASX -0.42% and KOSPI -0.62% at the time of writing. With Japan markets back from its holiday break, some catch-up losses may be at play, accounting for the relative underperformance. US Treasury yields were broadly flat to end the overnight session, but some unwinding in the risk environment, a firmer US dollar and higher oil prices may challenge room for upside in Asian equities. Chinese equities were somewhat resilient however, with the Nasdaq Golden Dragon China Index up 1.5% in the overnight session.

A series of PMI data will remain on watch ahead, notably with China’s Caixin services PMI following recent downside surprises in the official data. Earlier, Japan’s final au Jibun Bank Japan manufacturing PMI came in at its ten-month low (47.9 versus 48.3 in November) as a reflection of still-weak global demand. Some expectations are in place for a recovery in demand ahead, with any sustained upturn in production needed to provide the conviction for a policy pivot from policymakers.

For the USD/JPY, a stronger US dollar has put the pair back to retest a near-term resistance at the 143.80 level. A point of reckoning may be presented ahead, with its daily RSI back at its key 50 level, which it has failed to overcome since November 2023. Any successful move above the 143.80 level may leave the 146.45 level on watch next.

On the watchlist: Brent crude prices up more than 3%

A confluence of headlines around further tensions in the Red Sea and a full shutdown of Libya's Sharara oilfield from local protests have renewed concerns about global oil supply disruptions, which saw oil prices surge more than 3% overnight. This comes despite the broader risk-off move in global markets and a stronger US dollar, reflecting developments around geopolitical tensions as the greater driving force in the near term.

That said, prices have been trading on lower highs and lower lows since September 2023, with a descending channel in place. A series of resistance may still need to be overcome to indicate a potential trend reversal to the upside, which includes the upper channel trendline and its Ichimoku cloud resistance on the daily chart, leaving the US$82.50 level on watch for buyers to overcome.

Wednesday: DJIA -0.76%; S&P 500 -0.80%; Nasdaq -1.18%, DAX -1.38%, FTSE -0.51%