Dow Jones, Nasdaq 100 Outlook: Reflationary Trade Dissipating, Nikkei 225 Eyes BoJ

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Dow Jones, Nasdaq 100, US Inflation, Fed, BoJ, Nikkei 225, ASX 200 – Asia Pacific Indices Briefing

  • Dow Jones underperforms the Nasdaq 100 a day after the Fed
  • US breakeven rates hinting at ebbing long-run inflationary bets
  • Nikkei 225 eyes the BoJ, ASX 200 may fall as momentum fades

Thursday’s Wall Street Trading Session Recap

Following Wednesday’s Fed monetary policy announcement, market sentiment was mixed on Wall Street. On Thursday, the growth-oriented Nasdaq 100 gained 1.31% while the value-focused Dow Jones (E-mini futures) weakened 0.63%. Fading dovish expectations from the central bank may be playing a key role here, the US Dollar gained ground against its major counterparts.

Diminishing prospects of the reflationary trade may have been the driver behind equities on Wall Street. On the chart below, the Nasdaq Composite can be seen climbing since the middle of May. During this time, the US breakeven rate (5-year) declined from above 2.75% to just around 2.40%. This is the weakest reading in roughly four months.

Since breakeven rates are calculated by taking the difference between nominal yields and real equivalents, the outcome is a market gauge of anticipated inflation. In this case, the 5-year represents a long run outlook. Given the central bank’s less dovish stance, opening the door to rate hikes sooner than expected, this might be trimming inflation bets down the road. This may consequentially be driving investors back into growth stocks.

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Dow Jones, Nasdaq 100 Outlook: Reflationary Trade Dissipating, Nikkei 225 Eyes BoJ

Nasdaq 100 Technical Analysis

From a technical standpoint, the Nasdaq 100 appears to be trading higher within the boundaries of a bearish Rising Wedge chart pattern. However, negative RSI divergence does show that upside momentum is fading. That can at times precede a turn lower. Such an outcome may place the focus on rising support. Further clearing the latter may open the door to extending losses.

Nasdaq 100 – 4-Hour Chart

Dow Jones, Nasdaq 100 Outlook: Reflationary Trade Dissipating, Nikkei 225 Eyes BoJ

Chart Created in TradingView

Dow Jones Technical Analysis

The Dow Jones has extended losses after a bearish crossover between the 20- and 50-period Simple Moving Averages on the 4-hour chart below. This is offering a near-term downward bias as prices sit above the minor 14.6% Fibonacci extension at 33645. Further losses would likely place the focus on lows from May, making for key support between 33200 and 33402.

Dow Jones – 4-Hour Chart

Dow Jones, Nasdaq 100 Outlook: Reflationary Trade Dissipating, Nikkei 225 Eyes BoJ

Chart Created in TradingView

Friday’s Asia Pacific Trading Session

With that in mind, Asia Pacific equities could be looking at a mixed session to wrap up the remainder of the week. The economic docket is fairly quiet, with the key event risk being the Bank of Japan rate decision. Right before the decision, Japan’s latest inflation report turned positive for the first time in over a year. The year-over-year CPI (excluding fresh food) clocked in at 0.1% versus 0.0% anticipated.

But, that is unlikely to meaningfully shift the central bank’s policy approach. With price pressures still remaining so low, especially compared to other parts of the world, lose policy is still probably likely for some time. That may offer a boost to the Nikkei 225 benchmark stock index. Australia’s ASX 200 index could be vulnerable if commodity prices, especially metals like iron ore and copper, struggle climbing.

ASX 200 Technical Analysis

The ASX 200 continues to hover around record-high territory. This is as negative RSI divergence emerged, hinting that a top could be in store. But, both the 20- and 50-period SMAs continue to offer a near-term upward bias. A drop through the latter risks opening the door to extending losses. Otherwise, the 38.2% Fibonacci extension is in focus at 7450.

ASX 200 – 4-Hour Chart

Dow Jones, Nasdaq 100 Outlook: Reflationary Trade Dissipating, Nikkei 225 Eyes BoJ

Chart Created in TradingView

— Written by Daniel Dubrovsky, Strategist for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

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