Asia Day Ahead: US dollar on bid, Nikkei remains in rising wedge

Asia Open

The Asian session looks set for a slightly mixed open in today’s session, with Nikkei +0.98%, ASX +0.50% and KOSPI -0.48%. Risk sentiments will have the late-night bump in the US dollar to react to, thanks to less dovish Federal Reserve (Fed) Chair Jerome Powell’s comments, which seem to set the stage for a potential rate hold ahead. Above-target inflation and a resilient labour market were highlighted as the basis for more patience, and while market participants were somewhat prepared for that, hearing it from the Fed Chair right now seems to suggest that a pause in rate cuts may come earlier than before.

Based on the CME FedWatch, the rates market has seen the odds of a 25 basis point (bp) rate cut in December ease to 50% from previous 80%. If anything, the higher-than-expected US producer price index (PPI) reinforces the fact that the “last mile” inflation fight will be an arduous one. Given previous history of positive Wall Street performance during periods of rate hold, any jitters over a less dovish Fed ahead may offer buy-the-dip opportunities. The greater risks may come from a Fed’s reversion to rate hikes, which will then sound bigger alarms over inflation, but that is not the base case at least for now.

Chinese equities continue to see some shunning, with the Nasdaq Golden Dragon China Index (-1.8%) down for its third straight day. Disappointing revenue from JD.com revealed that China’s economic challenges are far from over, with consumer demand remaining soft and raising questions about the effectiveness of China’s recent stimulus.

A series of economic data out of China will be in focus today, including retail sales, industrial production and fixed asset investment. Expectations are for conditions to improve, with retail sales heading to 3.8% from 3.2% prior, while industrial production and fixed asset investment may see an improvement of 0.1%. Any upside surprise may help to offer a short-term bump in the markets, but we remain cautious of any fading in the rally, without a sizeable fiscal injection for its economy and knotty geopolitical ties with the US.

Technical analysis: Nikkei 225 remains in its broader rising wedge

The Nikkei 225 index continues to trade within a rising wedge pattern for now, with the formation of higher lows suggesting buyers in broad control. The 38,320 level at the lower wedge trendline may be a crucial support to hold, while on the upside, buyers may look to retest the 40,200 level next, followed by the 41,000, where the wedge resistance stands.