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Asia-Pacific indices under pressure: China's manufacturing decline signals weakening post-Covid recovery

Amid a downturn in economic data, the Hang Seng, ASX 200, and FTSE STI indices display critical changes in market trends and investors' focus shifts to possible stimulus measures to counterbalance the risks.

Source: Bloomberg

China's manufacturing slump and impacts on Asia-Pacific indices

Asia-Pacific indices have fallen sharply after China’s manufacturing activity contracted faster than expected in May, another sign that China’s post-Covid recovery is losing momentum.

The official manufacturing PMI dropped further into contraction territory to 48.8 in May from 49.2 in April, compared with expectations of 49.4.

This follows a string of weaker-than-expected data, including retail sales, industrial output, and fixed asset investment amid deepening producer price deflation.

China’s economic outlook has steadily improved after Beijing relaxed Covid restrictions, prompting a significant upgrade in China consensus economic growth forecasts for 2023 (see chart).

Most recently, though, some of the optimism has scaled back, as reflected in the slight downgrade in those assessments. The key focus will be on any stimulus measures to support the economy, which could cushion some of the downside risks.

Consensus growth expectations

Source: chart created by Manish Jaradi, TradingView

Hang Seng Index: Breaks below key support

The Hang Seng Index has broken below key horizontal trendline support at about 18800, reversing the higher-top-higher-bottom sequence that began in late 2022. This follows a failure in April to rise above a vital ceiling at the March high of 21000.

The index looks set to drop toward 17680 (the 61.8% retracement of the October 2022-January 2023 rally).

Subsequent support is seen at the end-2022 low of 16830. On the upside, the HSI, at minimum, would need to rise above the 200-day moving average for the downward pressure to begin fading.

Hang Seng index daily chart

Source: TradingView

ASX 200: Tail risk bearish scenario

It's probably a tail-risk scenario, but one that can’t be ignored. There is a potential head & shoulders pattern developing in the Australia ASX 200 index (the left shoulder at the December high, the head at the February high, and the right shoulder at the April high).

There is a long way to go before the neckline (that comes in at about 6900), and in all fairness, the pattern might not get triggered at all. Still, one needs to be mindful given the index is now attempting to break below immediate support at the early-May low of 7141, around the 200-day moving average.

A decisive break could raise the odds of a drop toward the neckline.

ASX 200 daily chart

Source: TradingView

FTSE: Risks a drop toward the lower end of the range

The retreat in February from stiff resistance on a horizontal trendline from 2019 and the subsequent lower high created in April has raised the odds of a drop toward the lower end of the range.

The Singapore FTSE Straits Times Index has been sideways for many months, and it looks like it may take a while before it starts trending again. Critical support is on the lower edge of the range at about 3025, near the 200-week moving average.

A decisive break below could threaten the post-Covid uptrend.

FTSE straits times index weekly chart

Source: TradingView

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