Asia markets lose positive tone

As EUR/USD hit the 61.8% retracement level, from the 1.0521-1.1467 up-leg seen between 14 April and 15 May, buyers enter the market in early European hours today. We see the euro heading back above $1.09.

Commuters walk past the old Shenzhen Stock Exchange in the Luohu district of Shenzhen, China
Source: Bloomberg

European equities also received a nudge higher although the tentative risk uptake is unlikely to have legs. This is simply because there is little change in the underlying conditions.

We would see if the single currency can run up above the 50-day moving average of 1.0961 to unleash greater rebound momentum.

Nonetheless, the broader picture is still scope for more downside.While most markets in Asia were placed on the backfoot on Wednesday, Chinese equities continue to defy momentum, seemingly immune to outside influence.

The stock indices initially came under pressure, consistent with negative overnight leads, before breaking free of the early weakness to head higher.

It is good to note that small-cap stocks, instead of larger counters, ‘save’ the day. Shenzhen Composite outperformed the bigger Shanghai index, gaining 1.2% versus 0.6%. The gap is more pronounced when we looked at CSI300 (-0.3%) and A50 (-1.4%) against ChiNext (+1.5%). The A50 appears to have an issue holding above 14,500.

Technically, the set-up remains bullish. Both trend and momentum indicators are pointing up. Hence I reckon any pullbacks should be contained. The first support level to watch would be the 20-day moving average at 13818, ahead of the 50-day moving average at 13166. Clearly, as I mention on several occasions, traders will need to have a higher-risk tolerance for the more volatile Chinese equity markets. Wider stops would be preferred.

On the other hand, the Nikkei was marginally higher despite a firmer USD/JPY and positive corporate news. The brief taking of the psychological 20,500 line may have run into heavy resistance, accompanied by some profit booking.

Mitsubishi Gas Chemical announced a share buyback, while Sumitomo Electric Industries upgraded its earnings forecast. Advances in industrial and consumer discretionary stocks were offset by declines in energy and healthcare counters.

The Straits Times Index finally saw some activity and none of it was bullish. The blue-chip index mirrored overnight market weakness, with 26 out of 27 STI components heading lower. Noble, Singtel, Global Logistic Properties, and Hong Kong Land were among the worst underperformers. The STI had pushed below the 100-day moving average at 3424, and a close under this level would suggest that the downmove can push on.

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