Poor start to the week; Chinese shares weighed down: Asia Day Ahead

The major US indices started the shortened trading week in the red (DJIA -0.72%; S&P 500 -0.47%; Nasdaq -0.16%), although the significant narrowing of losses at lunchtime, especially for the Nasdaq, may still reflect some strength among buyers. The energy sector (-2.3%) weighed most heavily on the market’s performance overnight, reflecting a drop in oil prices, while the consumer cyclical sector shone thanks to a 5.3% rise in Tesla.

Over the next two days, the spotlight will be on Fed Chairman Jerome Powell, who will present his report on monetary policy and the economy to the House Financial Services Committee today before testifying before the Senate Banking Committee tomorrow. The Fed chairman is likely to join his colleagues in maintaining his hawkish tone, but with market participants disbelieving the Fed’s latest forecasts, he will face a difficult task in providing much-needed conviction for his interest rate forecast.

Later in the day, UK inflation figures will also be in focus, with headline inflation expected to come in a tad lower at 8.4% from 8.7% previously, while core inflation is expected to remain unchanged from April at 6.8% y/y. Stubborn inflation is likely to reinforce the hawkish tone of the Bank of England (BoE) tomorrow, which has previously expressed unease about progress on inflation.

The VIX has struggled to move higher recently and is at its lowest level since February 2020, and after a 17% sell-off since the beginning of the month, the index has been forced into a short-term range on the daily chart, which shows a flat Moving Average Convergence/Divergence (MACD). Some stabilization attempts seem to be underway, although the catalyst for a sustained upward movement is still missing. Seasonal trends suggest that the VIX generally has a major uptrend in late July to early October. In the short term, a return above the 18.00 mark could provide some conviction that the important 20.00 mark will be retested.

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Source: IG charts

Asia Open

Asian stocks are expected to open subdued: Nikkei +0.23%, ASX -0.16% and KOSPI -0.29% at the time of writing. Chinese equities did not find much traction yesterday despite the series of interest rate cuts by the People’s Bank of China (PBOC) as market participants expect more to be done.

The Nasdaq Golden Dragon China Index plunged 4.9% overnight, while the Hang Seng Index retreated from its psychologically important 20,000 level. Alibaba’s leadership change is evidence of the difficult environment in which Chinese companies operate, even as regulatory risks take a back seat to recent efforts to reopen the company. On the calendar, early figures on South Korean exports pointed to the first increase (5.3% y-o-y) since August 2022, but continued weakness in semiconductors and petroleum products may still offer little reason to cheer.

The Nikkei 225 maintained some strength in today’s session as the Relative Strength Index (RSI) managed to return from overbought to neutral territory without a major dip. The MACD still indicates a bearish crossover, but previous attempts at a bearish crossover (June 1, 2023, June 9, 2023) have proven to be bear traps, so this indicator can be considered less of a solid guide. In the near term, perhaps the 20-day moving average (MA), which has consistently supported the index over the past two months, is worth watching. With the overall uptrend intact, a setback could still see the formation of a higher low, possibly at the 32,000 marks.

Source: IG charts

On the watchlist: Copper prices back to retest resistance confluence at US$8,600/tonne level

Copper prices have recently reacted positively to China’s easing measures, recovering by almost 10 % since the end of May this year. Hopes for a less bad than feared demand situation have risen as further stimulus measures from China are expected in the coming months, while market participants continue to assume that the Fed is heading for the final stage of tightening next month.

After three straight weeks of gains, prices have once again reached key resistance at USD 8,600/tonne. RSI above the 50 level and MACD trying to cross back into positive territory seem to support a short-term bullish bias, but a firm sit above the USD 8,600/tonne level may still be warranted for the bulls, where the Ichimoku cloud on the daily chart is waiting for a breakout.

Recovering the USD 8,600/tonne level could support a rebound to the March high at USD 9,100/tonne. On the downside, immediate support could lie at an uptrend line around the USD 8,270/tonne mark.

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Source: IG charts

Tuesday: DJIA -0.72%; S&P 500 -0.47%; Nasdaq -0.16%, DAX -0.55%, FTSE -0.25%

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