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Dow Jones May Lead Nikkei 225 Higher as Tapering Fears Ease

Dow Jones May Lead Nikkei 225 Higher as Tapering Fears Ease

Margaret Yang, CFA, Strategist

DOW JONES, NIKKEI 225, ASX 200 INDEX OUTLOOK:

  • Dow Jones, S&P 500 and Nasdaq 100 indexes closed +0.20%, +0.51% and +0.94% respectively
  • Investor confidence seemed to be revitalized by Powell’s patient stance on rate hikes
  • Asia-Pacific markets are positioned to trade slightly higher. Markit US manufacturing PMI readings are in focus

The Fed, USD, Crude Oil, PMI, Asia-Pacific Week-Ahead:

The Dow Jones Industrial Average rebounded for a second day after Fed Chair Jerome Powellreiterated his dovish assessment on monetary policy, soothing fears about tapering. He sees inflationary pressures to be “transitory”, and the Fed would be “patient” in waiting to lift borrowing costs during a congressional hearing on Tuesday. Wall Street stocks rebounded for a second day after hawkish-biased views from St. Louis Fed President James Bullard catalyzed a drastic selloff on Friday.

The recent market volatility reflects that investors remain jittery about the Fed’s tightening shift, as the economic recovery gathered pace and inflation readings surpassed expectations. This Friday’s Core US PCE readings will be closely eyed by traders for clues about rising price levels and the ramifications for the Fed’s policy guidance.

Meanwhile, demand for the Fed’s overnight reverse repo (ON RRP) facility hit an all-time high of $791.6 billion on June 22nd (chart below), reflecting swelling liquidity at financial institutions. This suggests that the markets may have sufficient liquidity to warrant a gradual scaling back of the Fed’s monthly asset purchases. A reverse-repo happens when a central bank sells securities and raises cash from the markets in order to provide stability in lending flows. It usually happens when there is too much liquidity (cash) and demand for interest-bearing securities rises.

Dow Jones May Lead Nikkei 225 Higher as Tapering Fears Ease

Source: Bloomberg, DailyFX

The US Dollar index retreated for a second day to 91.75, alleviating pressures on commodities and emerging market assets. Gold prices stabilized at around $1,770, but the overall trend may be tilted to the downside. Crude oil prices are hovering near two-and-half year highs of $72.9 even after the OPEC+ was reported to prepare for an increase in output from August onwards. This decision may be backed by a strong demand outlook, strength in oil prices as well as a fruitless nuclear talk between Iran and world powers recently.

Looking ahead, the BoJ meeting minutes dominates the economic docket today alongside Markit US manufacturing PMI readings. US manufacturing activity is expected to remain firmly in the expansionary territory, although economists foresee the PMI gauge to retreat slightly from May’s level (chart below). A higher-than-expected reading may add strength to the US Dollar, whereas a weaker one may result in the opposite. Find out more from DailyFX economic calendar.

Markit US Manufacturing PMI - Forecast

Dow Jones May Lead Nikkei 225 Higher as Tapering Fears Ease

Source: Bloomberg, DailyFX

Asia-Pacific markets are positioned for a mixed open today. Futures in Japan, mainland China, Hong Kong, South Korea, Taiwan, Malaysia and India are in the green, whereas those in Australia and Singapore are in the red.

Japan’s Nikkei 225 index looks set to extend Tuesday’s 3% rally as sentiment improves. Japan has removed the state-of-emergency measures in the Tokyo and Osaka area this week. Eased Covid-related restrictions could pave the way for the index to aim higher levels in the days to come with an eye on the 100-day SMA line.

Looking back to Tuesday’s close, 5 out of 9 Dow Jones sectors ended higher, with 43.3% of the index’s constituents closing in the green. Consumer discretionary (+1.27%) and materials (+0.62%) outperformed, whereas industrials (-0.25%) and communication services (-0.21%) trailed behind.

Dow Jones Sector Performance 22-06-2021

Dow Jones May Lead Nikkei 225 Higher as Tapering Fears Ease

Source: Bloomberg, DailyFX

Dow Jones Index Technical Analysis

The Dow Jones index is attempting to return to the “Ascending Channel” after briefly breaching below it.

An immediate support level can be found at 33,320 – the 161.8% Fibonacci extension, whereas a key resistance can be found at 34,920 – the 200% Fibonacci extension. Bearish MACD divergence suggests that prices may be vulnerable to a technical correction as bullish momentum fades.

Dow Jones Index Daily Chart

Dow Jones May Lead Nikkei 225 Higher as Tapering Fears Ease

Nikkei 225 Index Technical Analysis:

The Nikkei 225 index is attempting to breach above the ceiling of the “Descending Channel” for a second time. A successful try would likely intensify near term buying pressure and open the door for further gains with an eye on the 100-day SMA line. The next resistance level can be found at 30,200- the 127.2% Fibonacci extension.

Nikkei 225 Index Daily Chart

Dow Jones May Lead Nikkei 225 Higher as Tapering Fears Ease

ASX 200 Index Technical Analysis:

The ASX 200 index is challenging a key resistance level of 7,340, breaking which may lead to further gains towards 7,500 – the 200% Fibonacci extension. The overall trend remains bullish-biased as prices formed consecutive higher highs and higher lows. The MACD indicator formed a bearish crossover however, suggesting that upward momentum may be fading.

ASX 200 Index – Daily Chart

Dow Jones May Lead Nikkei 225 Higher as Tapering Fears Ease

--- 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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