Rising Yields May Weigh on Prices

DOW JONES, HANG SENG, ASX 200, ASIA-PACIFIC MARKET OUTLOOK:

Asia-Pacific markets may trade lower as US equity futures retreated from record highs
Rising Treasury yields and a stronger USD may exert downward pressure on equities, commodities
UK and Canada core inflation, US retail sales figures are in focus today

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Yields, US Dollar, Gold, Inflation, Asia-Pacific Stocks Outlook:

US equity futures edged lower on Wednesday morning after major stock benchmarks closed near record highs overnight. Investors are probably trying to strike a balance between reflation hopes and seemingly overstretched valuations, allowing recent rallies to take a brief pause. The S&P 500 index is trading near 32.3 times price-to-earnings, far above its five-year average of 21.2. Rich multiples may render the index vulnerable to profit-taking should rising yields and a stronger US Dollar trigger a technical pullback.

It is worth noting that the 10-year Treasury yield climbed more than 10bps overnight to 1.321%, the highest level seen in almost a year. Rising yields may exert further downward pressure on precious metal prices, because the opportunity cost of holding non-yielding assets becomes higher. For equities, it means that intrinsic value becomes lower when future cash flow steams are discounted back at a higher required rate of return.

Gold prices plunged 1.26% and broke below the US$ 1,800 mark as yield climbed alongside a stronger USD. WTI crude oil prices stayed elevated however, backed by cold blast in parts of the US and disruption in crude oil production in Texas.

US 10-Year Treasury Yield vs. Dow Jones

Chart by TradingView

Asia-Pacific equities look set to retreat from Monday’s highs as profit-taking activity kicks in. Futures across Japan, Australia, Hong Kong, Singapore and India are pointing to a lower start. Mainland Chinese bourses remain shut for the Chinese New Year holiday and will re-open on Thursday. In the currency market, the risk-sensitive Australian and New Zealand Dollars edged lower, suggesting that sentiment is titled to the bearish side.

Hong Kong’s Hang Seng Index (HSI) advanced 1.9% on Tuesday, breaking through the 30,000 psychological resistance level with no hesitation. Property and finance sub-sectors were leading, with HSBC (+7.65%) being the single largest contributor to the index’s gain. With the return of mainland investors on Thursday, sectoral rotation may lean towards in favor of technology firms again.

Source: his.com.hk

Australia’s ASX 200 index opened slightly lower, dragged by consumer staples (-2.09%), healthcare (-2.00%) and information technology (-1.51%) sectors. Materials (+1.68%) and financials (+0.49%) were doing the heavy lifting.

On the macro front, core inflation rates from UK and Canada will put the British Pound and Canadian Dollar in focus today. The release of January US retail sales data will also be closely eyed by traders for clues into the health of the consumption market. Markets foresee a 1.1% MoM growth in retail sales, revising three consecutive months’ of mild contraction. This is in view of the latest round of stimulus payments and improved pandemic situation in January. Find out more on the DailyFX calendar.

Sector-wise, 5 out of 9 Dow Jones sectors climbed on Tuesday, with 43.3% of the index’s constituents closing in the green. Financials (+1.60%), industrials (+1.06%) and materials (+1.03%) were among the best performing sectors, while healthcare (-1.27%) and communication services (-0.57%) trailed behind.

Dow Jones Sector Performance 17-02-2021

Source: Bloomberg, DailyFX

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Dow Jones Index Technical Analysis:

Technically, the Dow Jones index resumed its upward trajectory after returning to the “Ascending Channel”. Prices continued to move higher within the upper Bollinger Band, pointing to further upside potential with an eye on 31.910 – the 76.4% Fibonacci extension level. The upper Bollinger Band may serve as a dynamic resistance level, whereas the 20-Day Simple Moving Average (SMA) line may be viewed as an immediate support.

Dow Jones Index – Daily Chart

Hang Seng Index Technical Analysis:

The Hang Seng Index broke above a key resistance level of 30,140 and has since opened the door for further upside potential. The index is hitting the upper Bollinger Band, suggesting that a technical pullback is possible before attempting for higher highs. Immediate support and resistance levels can be found at 30,477 (61.8% Fibonacci extension) and 31.080 (76.4% Fibonacci extension) respectively.

Hang Seng Index – Daily Chart

ASX 200 Index Technical Analysis:

The ASX 200 index is trending higher within the “Ascending Channel” as highlighted below. The overall trend remains bullish-biased as suggested by upward-sloped Moving Averages. An immediate resistance level can be found at 6,935 (the 200% Fibonacci extension), and an immediate support level can be found at 6,780 (20-Day SMA).

ASX 200 Index – Daily Chart