Asia Day Ahead: STI broke to a near three-month high

Asia Open

The Asian session looks set for a subdued open, with Nikkei +0.24%, ASX -0.14% and KOSPI +0.49% at the time of writing. With the US markets closed for holiday, lesser cues for the broader risk environment were presented, as markets will look towards the upcoming US non-farm payroll data to further anchor views for a September rate cut from the Federal Reserve (Fed). The anticipation may limit some risk-taking in the region, but market moves should be relatively stable with a slightly weaker US dollar.

Attention has been focused on the UK elections, with exit polls coming in line with what markets were expecting – a Labour Party’s landslide victory. The polls points to Labour winning 410 seats out of 650, with the Conservatives on 131, and given its historical accuracy with the official results, the stage is likely set for an end to the Conservatives’ grip on power. The no-surprise outcome in the exit polls may bring a more lukewarm reaction in global markets.

Highlight on the economic calendar may be the unexpected contraction in Japan’s household spending (-1.8% versus 0.1% expected) in May, as private consumption remains weak amid higher prices. The data may complicate the Bank of Japan (BoJ)’s policy normalisation process for now, but one may still watch for any impact from higher wages in supporting spending ahead.

US non-farm payrolls on watch ahead

The US non-farm payrolls will be on watch today to validate the recent run in softer US labour conditions, ranging from softer private payrolls to jobless claims and the Institute for Supply Management (ISM) employment surveys. Markets are looking for the US economy to add 190,000 jobs and for the unemployment rate to remain stable at 4.0%. Average hourly earnings are expected to fall to 3.9% year-on-year from 4.1% prior.

Moderation in US labour conditions may offer more room for the Fed to consider earlier rate cuts, but given the weaker set of data presented this week (ISM surveys, factory orders, jobless claims) the threshold for the Fed to delay easing beyond September may be high.

On the radar: Straits Times Index (STI) on a near three-month high

Performance in the STI has been stellar over the past week, with the index gaining 3.2% so far, following an upward breakout across the three local banks. Slightly higher longer-term Treasury yields may play a part, with expectations that it may contribute positively to its net interest margin moving forward. Accompanied with views for further recovery in its non-interest income and economic resilience in the region, expectations may be brewing for them to deliver once again in the upcoming earnings season.

The STI stands just mere 0.6% from its 2022 high at around the 3,458 level, with an upward break of this level potentially paving the way for the index to retest its 2018 high at the 3,641 level. Higher lows presented in its daily relative strength index (RSI) may support an upward bias, although near-term overbought conditions may leave buying-on-dips as the preferred move.