Nikkei 225 tracks Wall Street higher, gold bears eye another drop

Asian share markets were buoyant on Monday on refreshed hopes that central banks will be better placed to cut rates this year. While a key US inflation report on Friday saw the headline figures come in as expected, real spending was -0.1% lower and a print of core PCE of 0.2% m/m was its slowest rate of inflation since November. I wouldn't go as far as to say the Fed's fight against inflation is over, but it was enough to boost appetite for risk and send the US dollar lower.

APAC index futures were mostly higher on Monday, with the Hang Seng, Nikkei, TOPIX, and KOPSPI all rising over 1%. With the ECB fully expected to cut rates for the first time in eight years this week, and the potential for the BOC to also cut rates on the table, this has certainly boosted sentiment. However, for these reactions to sustain their advance and for Wall Street to break to new highs, we will likely need to see some weak numbers from the ISM and NFP reports this week.

S&P 500, Nasdaq 100, Dow Jones futures chart:

The S&P 500 rose 0.8% and formed a prominent bullish outside, the Dow Jones snapped a 6-day losing streak and the Nasdaq 100 recouped earlier losses to close back above the March high with a bullish pinbar. It remains debatable as to whether Wall Street can simply break to new highs, but it clearly shows that bulls are not ready to throw in the towel just yet.

Nikkei 225 technical analysis:

Last week I outlined a bearish scenario for the Nikkei with potential downside targets at 37k and 35k, but if Wall Street indices continue to bounce with risk, then the short bias becomes invalidated with a break above the May high (39,460).

For now, I will stick to my guns and view the current rally as an optimistic knee-jerk reaction to Friday's PCE data. Because if ISM and NFP produce semi-decent figures, it remains hard to justify an overly-dovish Fed.

The daily chart shows the Nikkei is likely to close higher for a second day after finding support at the 100-day EMA. If confident that US data will remain firm, bears may seek to enter around current levels with a stop above the May high. This keeps the reward-to-risk ratio favorable for bears with a clear line in the sand to abort should momentum rip higher.

Gold technical analysis:

Spot gold prices have effectively remained within a $33 range since they fell -4% over two weeks ago. And I suspect they could break out of that range this week, given the economic calendar. While fundamentals are likely to continue supporting gold overall, I am not yet convinced we have seen the end of the move lower from its recent record high.

The strong fall from the all-time high set in May has had time to pause for breath, so my bias is for at least one more dip lower.

The daily chart shows that a bearish engulfing candle formed on Friday, and its high failed to retest the highs around $2365. The bias is to fade into minor rallies within Friday's range with a view for spot prices to retest $2300.

The 1-hour chart shows momentum is turning higher, and I am now patiently waiting for evidence of a swing high (and lower high) to form around a resistance level. Areas to consider could include the weekly pivot point ($2336), the previous consolidation ($2340/50), or the monthly pivot, near the weekly R1 pivot and 200-bar EMA.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge