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ASX 200, Nikkei 225 Outlook: Pressure from Rising Yields, Stronger USD

ASX 200, Nikkei 225 Outlook: Pressure from Rising Yields, Stronger USD

Margaret Yang, CFA, Strategist

DOW JONES, NIKKEI 225, ASX 200 INDEX OUTLOOK:

  • ASX 200, Nikkei 225 indexes face a souring day as US stocks retreated from record highs
  • 10-year Treasury yield climbed to 1.15% on a rising inflation outlook, USD edged higher
  • Stocks, commodities, EM currencies may struggle to sustain their recent rally, eyeing a pullback

Dow Jones, Yields, USD, Commodities, Bitcoin, Asia-Pacific at Open:

Asia-Pacific equities face a tough day ahead as US equities retreated alongside commodities prices in a wake of rising longer-dated US Treasury yields. The inflation outlook appears to be buoyed by stimulus and reflation hopes after Democrats gained control of the Senate, raising the likelihood of further spending that aims to raise demand and output in the long term. Over last week, the 10-year US Treasury yield surged more than 20 bps to 1.147% – a significant move that rippled across the financial markets. The 20- and 30-year yields also climbed to 1.685% and 1.885% respectively.

Treasury bonds are deemed “risk-free” as they are backed by the full faith and credit of the US government. Rising yields raise the risk-free rate and therefore the required rate of return for holding equities, making stocks less appealing to investors as their intrinsic value drops when future income streams are discounted back at a higher required rate of return. Besides, higher real yields may also encourage capital to flow into Treasuries as their risk-adjusted return becomes more attractive. It is also a clear negative to commodities, as the opportunity cost of holding them becomes higher.

The DXY US Dollar index rebounded from a two-and-half year low to 90.50, exerting downward pressure on equities, commodities and EM currencies. The DXY and the S&P 500 index exhibited a negative relationship, showing a correlation coefficient of -0.86 over the past 12 months.

S&P 500 Index vs. DXY US Dollar Index

ASX 200, Nikkei 225 Outlook: Pressure from Rising Yields, Stronger USD

Source: Bloomberg, DailyFX

In Asia-Pacific, equity futures across Japan, mainland China, Hong Kong, Taiwan, Singapore and Malaysia are pointing to a lower start, albeit Australia’s ASX 200 index opened mildly higher. Negative sentiment from the US markets alongside a pause in the commodity rally may inhibit investors from taking excess risk at the moment and encourage profit-taking. Bitcoin prices tumbled as much as 20% on Monday before bouncing 10% higher this morning.

Looking back to Monday, 6 out of 9 Dow Jones sectors ended higher, with 40% of the index’s constituents closing in the green on Monday. Materials (+1.12%), energy (+0.57%) and financials (+0.41%) were among the best performers, whereas information (-1.11%) and industrials (-0.85%) were trailing behind.

Dow Jones Sector Performance 11-01-2021

ASX 200, Nikkei 225 Outlook: Pressure from Rising Yields, Stronger USD

Source: Bloomberg, DailyFX

Dow Jones Top 10 Stock Performance 11-01-2021

ASX 200, Nikkei 225 Outlook: Pressure from Rising Yields, Stronger USD

Source: Bloomberg, DailyFX

Dow Jones Index Technical Analysis

The Dow Jones indexis hitting the upper ceiling of “Ascending Channel” and may face some selling pressure here. Price broke above a key resistance level of 30,870 (the 100% Fibonacci extension) last week and thus has opened the door for further upside potential. The overall trend remains bullish-biased, although a minor pullback towards the 100% Fibonacci level is likely before attempting higher highs.

Dow Jones Index Daily Chart

ASX 200, Nikkei 225 Outlook: Pressure from Rising Yields, Stronger USD

Nikkei 225 Index Technical Analysis:

The Nikkei 225 index has likely entered a technical correction as price recedes from recent high. The formation of a bearish “AB=CD” pattern points to further retracement towards an immediate support level of 28,000 and then 27,500. The overall trend remains bullish-biased as suggested by upward-sloped 20-, 50- and 100-Day Simple Moving Average (SMA) lines, albeit a technical pullback appears to be underway.

Nikkei 225 IndexDaily Chart

ASX 200, Nikkei 225 Outlook: Pressure from Rising Yields, Stronger USD

ASX 200 Index Technical Analysis:

The ASX 200 index remains within its “Ascending Channel” as highlighted on the chart below, but upward momentum appears to be faltering as the MACD indicator trends lower. An immediate support level can be found at 6,630 – the 161.8% Fibonacci extension level. A firm break down below this level may open the door for further losses. An immediate resistance level can be found at 6,760 – the upper Bollinger band.

ASX 200 Index – Daily Chart

ASX 200, Nikkei 225 Outlook: Pressure from Rising Yields, Stronger USD

--- Written by Margaret Yang, Strategist for DailyFX.com

To contact Margaret, use the Comments section below or @margaretyjy on Twitter

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

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