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ASX 200 & Nikkei 225 Forecast: US-China Tensions Threaten Gains

ASX 200 & Nikkei 225 Forecast: US-China Tensions Threaten Gains

Thomas Westwater, Analyst

ASX 200, Nikkei 225, US-China Tensions, COVID-19, Hong Kong – Talking Points:

  • Political tensions between the U.S. and China threaten bullish momentum
  • Trump news conference Friday set to be key driver for the ASX and Nikkei
  • Technical setup may give way to fundamentals as risk appetite degrades

Tensions surrounding China are moving back into the fold, as the COVID-19 pandemic and China’s encroachment into Hong Kong turn the heat back up on relations between the United States and China. Still, investors have shrugged off the renewed headwinds, for now. The ASX 200 index is up nearly 30 percent since getting crushed to its lowest level since 2012 in March. Bulls, however, have slightly favored Japan’s Nikkei 225 index, bidding it 34 percent higher since its March lows.

ASX 200 Index & Nikkei 225 Index Price Chart (Daily Time Frame)

ASX 200 Index and Nikkei 225 index chart

Chart Created in TradingView by Thomas Westwater

While the market flashed warning signs in recent weeks - such as the risk-sensitive AUD/USD selling off at its March 9 resistance level on Wednesday. Bulls in both equity and forex markets have yet to capitulate to macro themes surrounding the increasing tensions between Hong Kong and China, an issue that may begin to dictate the more prominent US-China relationship.

AUD/USD Price Chart (Daily Time Frame)

AUDUSD price chart risk appetite

Source: IG Charts

On the other hand, market bulls are hardly driving prices higher on blind enthusiasm. Monetary efforts from Australia and Japan have been aggressive considering the COVID-19 pandemic. The RBA lowered its cash rate to 0.25%, a record low for the bank. Meanwhile, the BOJ continues its aggressive bond buying program. On the fiscal side, Japan most recently bolstered its fiscal response, with the country approving a new $1.1 trillion stimulus package on Wednesday.

However, risks to the rally exist at week’s end as U.S. President Trump announced a press conference to be delivered Friday regarding China. Equity markets in the U.S. gave up gains into the closing minutes on Thursday alongside the news report. The Trump administration is expected to announce action punishing China for the recent events seen in Hong Kong.

Turning to the technical picture on the ASX 200 index, bulls have controlled the tempo of price for the better part of the last couple of months. However, Thursday’s price action formed a Gravestone Doji, as buyers failed to sustain a push higher on the daily time frame. Bulls ran into resistance near the bottom edge of a still open gap formed in early March.

ASX 200 Index (Daily Time Frame)

ASX 200 & Nikkei 225 Forecast: US-China Tensions Threaten Gains

Source: IG Charts

Looking at Japan’s Nikkei 225 Index reveals a more optimistic outlook for the technical setup. The index’s price action shows that bulls have enjoyed considerable progress in recent months, with few points of resistance as the index progresses towards recovering March’s COVID-19 induced selloff.

Japan 225 Index (Daily Time Frame)

ASX 200 & Nikkei 225 Forecast: US-China Tensions Threaten Gains

Source: IG Charts

Thursday saw bulls overtake the 200-day moving average as the index closed 42 points above the closely watched technical indicator. Nevertheless, the fundamental backdrop concerning China and the United States may overtake the encouraging technical setup.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.