Asia Day Ahead – China’s stimulus hopes remain on centre stage: US energy sector, Hang Seng Index, Brent crude

Market Recap

Wall Street headed higher to start the new trading week (DJIA +0.52%; S&P 500 +0.40%; Nasdaq +0.19%), as another pull-ahead in value sectors (financials +1.0%, energy +1.7%) paved the way for the DJIA to achieve its 11-day winning streak. Nevertheless, overall sentiments are still treading on some cautious optimism, with the VIX ticking higher lately and adding another 2.3% overnight. Investors’ sentiments remain in “extreme greed” territory as well (CNN Fear & Greed Index), while the recent CFTC data revealed that short-covering from large speculators in the S&P 500 has taken a pause last week.

Overnight, a series of flash purchasing managers index (PMI) data presented downside risks to growth, with softer-than-expected read out of Eurozone, UK and US’ services sector but initial jitters were quickly overshadowed by US earnings releases. Thus far, 20% of S&P 500 companies have released their results, with 75% delivering an earnings beat, which is slightly higher than the 10-year average of 73%. The outperformance momentum supports the narrative of corporate earnings being less bad than feared, with market expectations still rooting for an end to the ‘earnings recession’ and subsequent recovery over coming quarters.

One to watch may be the Energy Select Sector SPDR Fund, as oil prices delivered a new higher high overnight with a 2.3% gain. The sector has pushed above its Ichimoku cloud (daily) and a downward trendline resistance lately, with the relative strength index (RSI) hovering above its key 50 level. The US$87.53 level may stand as immediate resistance for a retest, with any successful break potentially leaving its year-to-date high at the US$93.00 level in sight.

Asia Open

Asian stocks look set for a subdued open, with Nikkei -0.39%, ASX +0.28% and KOSPI +0.07% at the time of writing. Mounting hopes for China’s stimulus will likely take centre stage in today’s session, with the China’s Politburo pledge to step up support for the property sector and domestic consumption likely to provide some reassurances for Chinese equities. The Nasdaq Golden Dragon China Index was up 4.3% overnight, potentially setting the stage for China stock indices to gain some ground after yesterday’s downbeat performance. Whether any gains can be followed through will still depend on the specifics, with widening bond yield differentials with the US and a weakening yuan looked upon as potential limiting factors for too-aggressive moves.

The economic calendar this morning saw a slight outperformance in South Korea’s Q2 gross domestic product (GDP), up 0.6% QoQ versus the 0.5% forecast. Year-on-year, it is up 0.9% versus the 0.8% expected. But considering that consumer and business spending continues to weaken, while the outperformance is partly contributed by a deeper drop in imports compared to its exports, economic challenges could still be presented ahead.

The day ahead will leave Indonesia’s interest rate decision on watch. Keeping policies unchanged with a continued rate hold is the wide consensus, with more wait-and-see expected despite some moderation in growth conditions lately.

On the watchlist: New higher high formed for oil prices as buyers took greater control

Oil prices have pushed to its highest level in three months overnight, with the formation of a new higher high supporting its near-term upward bias, following a breakout from its previous consolidation pattern. Buyers seem to be taking greater control, tapping on expectations for further China’s stimulus and a tighter-supply outlook with Saudi Arabia’s output cuts taking effect, along with a potential halt in US Strategic Petroleum Reserve (SPR) drawdown.

For Brent crude prices, a touch above its 200-day moving average (MA) for the first time since August 2022 may be significant, which indicates an attempt for a potential trend reversal. CFTC data revealed some build-up in net-long positions among money managers this month (net 206,099 contracts versus 141,429 in early-July). Further upside may place its year-to-high on watch at the US$87.30 level, with the key US$80.00 serving as an immediate support for buyers to defend.

Monday: DJIA +0.52%; S&P 500 +0.40%; Nasdaq +0.19%, DAX +0.08%, FTSE +0.19%