Weak performance in growth sectors could weigh on the Nikkei, as talk of intervention in the Japanese yen was reignited following a sharp move in the USD/JPY pair.

Open Asia

The Asian session is likely to start weakly with the Nikkei down 1.55%, the ASX down 0.23% and the KOSPI down 0.92%.

Surprises in the US Consumer Price Index (CPI) data last night seemed to fit with the “good data” that the US Federal Reserve (Fed) was expecting, further strengthening the case for a rate cut in September. Market expectations for interest rates now stand at an 85% probability of a 25 basis point (bp) cut in September, up from 70% before the data was released.

Amidst the dovish interest rate bets, US Treasury yields and the US dollar responded lower as expected, but the surprise may come from the overnight pullback in US tech. This looks more like a rotation from top performers to laggards than a risk-off move, while other sectors are in the green, with the Russell 2000 up 3.8%. The VIX is also fairly muted at +0.5%. All of the Magnificent Seven stocks are down at least 2%, with Nvidia down 5.6% in the red and Tesla up 8.4%. Any further divergence going forward should be watched to confirm the growth-to-value rotation trend.

Weakness in growth sectors could weigh on the Nikkei, just as talk of intervention in the Japanese yen was revived following a huge move in USD/JPY following US CPI data. You can check out USD/JPY analysis on IG Forex (FX) Watch. If the shift to value is intact, Chinese stocks could potentially find some support, coupled with further short-selling curbs recently, which gives room to weaken the prevailing bearish sentiment.

Hang Seng Index (HSI): Still need more conviction that buyers are taking control

The HSI has retreated as much as 12% from its May 2024 peak, trading in a short-term downtrend channel in recent months. Its daily Relative Strength Index (RSI) has returned to retest the key 50 level, where buyers have so far failed to find a decisive breakout above the midline on four previous occasions since June. Any breakout above the midline could be seen to signal that buyers are taking more control.

Further growth could also signal a break of the upper channel trendline short-term resistance. On the downside, a confluence of support can be found at 17,200, where the uptrendline support is found alongside the lower channel trendline support.