Dow Jones & Nasdaq 100 Could Give Up Gains Despite Upbeat China PMI Data

Why Do Traders Need to Watch the Bank of Japan and the Japanese Yen?

A potentially more dovish Fed rate path coincides with a possible Bank of Japan rate hike in the fourth quarter. The combination of Fed rate cuts and a BoJ rate hike could sink USD/JPY, potentially triggering a Yen Carry Trade unwind.

The USD/JPY has fallen from 150.917 (August 1) to 146.948 (September 1) over expectations of a narrower interest rate differential, in favor of the yen. A sharper fall in the USD/JPY pair could trigger margin calls on risk asset holdings and force investors to unwind Yen carry trades, further strengthening the Yen.

In 2024, the Nasdaq Composite Index plunged 11.2% from July 31 (2024) to August 5 (2024) in response to the BoJ reducing its purchases of Japanese Government Bonds (JGBs) and unexpectedly raising interest rates. The July monetary policy decision led to margin calls and a yen carry trade unwind.

US Futures Rise but Sit on Shaky Ground

Beyond Asia, attention shifted to US markets, where stock futures edged higher in the morning session. Upbeat data from China and hopes for a US-China trade deal lifted US stock futures. China’s chief trade negotiator Li Chenggang met with US officials last week to discuss trade terms.

The Nasdaq 100 E-mini and S&P 500 E-mini rose 17 points and 4 points, respectively, while the Dow Jones E-mini gained 45 points. However, the gains were modest given market caution ahead of this week’s key economic data releases, leaving US futures on shaky ground.

Outlook: US Labor Market Data in Focus

Looking ahead, investors should brace for heightened market volatility. US JOLTs job openings, ADP employment change, initial jobless claims, and the Jobs Report will spotlight the US labor market.

Softer labor market data would likely raise expectations of multiple Fed rate cuts, lifting sentiment. On the other hand, stronger jobs data could signal a more hawkish Fed rate path, weighing on stocks. The BoJ will likely be closely monitoring the data and the Fed’s policy signals. It’s plausible for the BoJ to delay rate hikes if the Fed hints at aggressive rate cuts to avoid market disruption.

Technical Levels to Watch

The broader short-term bias remains bullish following the morning gains. However, bullish momentum hinges on the upcoming Jobs Report (September 5).

Dow Jones

• Resistance: August 22 high of 45,841, 46,000, then 46,500.
• Support: 45,500, 45,000, and then the 50-day EMA (44,513).