Nikkei rebound inline with expectations- Where Next?
By Danish Lim Zhi Lin, Investment Analyst
Current Performance of SGX Nikkei 225:
The Nikkei 225 Index looks to have recovered from a dreadful start to the month where the Nikkei 225 Index plunged -12.40% on a single day on 5 August due to an unfavourable combination of carry trade unwinding, tighter BOJ monetary policy, and US recession fears.
Since then, the index has rallied by over 20%. As mentioned in the previous post, this recovery was in-line with our forecast as we expected the BOJ to tread more carefully regarding monetary policy moving forward.
At the same time, the importance of the increase in real wages, the first in 27 months, cannot
be understated, as we view it as a key ingredient of the long sought-after wage-price cycle that
will support consumer spending and boost sentiment.
Lastly, US recession fears have eased following upbeat retail sales data and CPI readings that met estimates. Markets are now pricing in 100bps of rate cuts by year-end (CME FedWatch Tool).
Japan seeing Green Shoots
Japan Q2 GDP expanded by 3.1% QoQ, well above estimates of 2.3% and a notable increase from the previous reading which showed a decline of -2.3%. Growth was led by private consumption, which rose 1.0% vs estimates of 0.6%. Business spending also rose 0.9% vs estimates of 0.8%.
This fuelled optimism that a virtuous cycle linking rising wages to increased spending may be emerging, helping spur stable demand-led inflation.
Other developments
BOJ deputy governor Shinichi Uchida played down any further chances of a rate hike, stating that recent market moves were “extremely volatile” and that they won’t raise rates when the market is unstable.
Japan PM Fumio Kishida stepped down from his position and said he will not seek re-election on 14 August, paving the way for the ruling party to vote on his successor on September 27. The Yen moved slightly higher following his decision. It appears that the timing of the decision came as a surprise but the decision itself may not have been much of a surprise, given Kishida’s unpopularity and poor public support.
Investors will be watching the leadership change closely and its potential implications on the Yen. Although we believe greater emphasis will be placed on the BOJ’s monetary policy.
Nikkei 225 Outlook & Trading Opportunity:
With the key downside catalysts having eased, we expect markets to re-focus on the medium- to long-term fundamentals that provide support for Japan. Private spending and consumption are likely to continue gaining momentum.
The recent strengthening of the yen may also help soothe consumers’ concerns about imported inflation, with the Yen recently gaining amid expectations for the US-Japan interest rate differential to narrow as the Fed responds to cooling inflation and a slowing job market with rate cuts as early as September.
Expressing Our View:
We maintain our trade setup below to express our view:
Long SGX Nikkei 225 Index Futures
Based on a Fibonacci Extension drawn from the March 2023 low to the July 2024 high, the daily chart shows the contract having bounced back up from the 5 August low of 30,515 to around the 0.500% extension level at 38,185 as of noon on 20 August.
Several technical indicators support our bullish bias:
- The MACD line is shown to have crossed over the signal line.
- The MACD histogram is also in positive territory.
- RSI is not in overbought territory of 70
Entry is set at our previous target price of 37,870.
We see near-term resistance at the 0.500% extension level at 38,650. If this level is breached, the contract could push higher towards the 0.618% extension level at 40,565. We set our target price at 42,000, close to the all-time high set by the index in July 2024.
• Entry Level: 37,870 (Previous target that was hit)
• Target Level: 42,000
• Stop Loss Level: 36,000
• Profit at Target: 3020 x ¥500= ¥2,065,000
• Loss at Stop: 1750 x ¥500= ¥935,000
• Reward: Risk Ratio: 2.21x
Trade Nikkei 225 at only 50 cents* now
Capitalise on the Nikkei 225’s movements—trade SGX Nikkei 225 Index Futures at only 50 cents* now with Phillip Nova.
*For applicable terms and conditions and a full risk disclaimer, please refer to phillipnova.com.sg. This ad has not been reviewed by MAS.
Current Performance of SGX Nikkei 225:
The Nikkei 225 Index looks to have recovered from a dreadful start to the month where the Nikkei 225 Index plunged -12.40% on a single day on 5 August due to an unfavourable combination of carry trade unwinding, tighter BOJ monetary policy, and US recession fears.
Since then, the index has rallied by over 20%. As mentioned in the previous post, this recovery was in-line with our forecast as we expected the BOJ to tread more carefully regarding monetary policy moving forward.
At the same time, the importance of the increase in real wages, the first in 27 months, cannot
be understated, as we view it as a key ingredient of the long sought-after wage-price cycle that
will support consumer spending and boost sentiment.
Lastly, US recession fears have eased following upbeat retail sales data and CPI readings that met estimates. Markets are now pricing in 100bps of rate cuts by year-end (CME FedWatch Tool).
Japan seeing Green Shoots
Japan Q2 GDP expanded by 3.1% QoQ, well above estimates of 2.3% and a notable increase from the previous reading which showed a decline of -2.3%. Growth was led by private consumption, which rose 1.0% vs estimates of 0.6%. Business spending also rose 0.9% vs estimates of 0.8%.
This fuelled optimism that a virtuous cycle linking rising wages to increased spending may be emerging, helping spur stable demand-led inflation.
Other developments
BOJ deputy governor Shinichi Uchida played down any further chances of a rate hike, stating that recent market moves were “extremely volatile” and that they won’t raise rates when the market is unstable.
Japan PM Fumio Kishida stepped down from his position and said he will not seek re-election on 14 August, paving the way for the ruling party to vote on his successor on September 27. The Yen moved slightly higher following his decision. It appears that the timing of the decision came as a surprise but the decision itself may not have been much of a surprise, given Kishida’s unpopularity and poor public support.
Investors will be watching the leadership change closely and its potential implications on the Yen. Although we believe greater emphasis will be placed on the BOJ’s monetary policy.
Nikkei 225 Outlook & Trading Opportunity:
With the key downside catalysts having eased, we expect markets to re-focus on the medium- to long-term fundamentals that provide support for Japan. Private spending and consumption are likely to continue gaining momentum.
The recent strengthening of the yen may also help soothe consumers’ concerns about imported inflation, with the Yen recently gaining amid expectations for the US-Japan interest rate differential to narrow as the Fed responds to cooling inflation and a slowing job market with rate cuts as early as September.
Expressing Our View:
We maintain our trade setup below to express our view:
Long SGX Nikkei 225 Index Futures
Based on a Fibonacci Extension drawn from the March 2023 low to the July 2024 high, the daily chart shows the contract having bounced back up from the 5 August low of 30,515 to around the 0.500% extension level at 38,185 as of noon on 20 August.
Several technical indicators support our bullish bias:
- The MACD line is shown to have crossed over the signal line.
- The MACD histogram is also in positive territory.
- RSI is not in overbought territory of 70
Entry is set at our previous target price of 37,870.
We see near-term resistance at the 0.500% extension level at 38,650. If this level is breached, the contract could push higher towards the 0.618% extension level at 40,565. We set our target price at 42,000, close to the all-time high set by the index in July 2024.
• Entry Level: 37,870 (Previous target that was hit)
• Target Level: 42,000
• Stop Loss Level: 36,000
• Profit at Target: 3020 x ¥500= ¥2,065,000
• Loss at Stop: 1750 x ¥500= ¥935,000
• Reward: Risk Ratio: 2.21x
Trade Nikkei 225 at only 50 cents* now
Capitalise on the Nikkei 225’s movements—trade SGX Nikkei 225 Index Futures at only 50 cents* now with Phillip Nova.
*For applicable terms and conditions and a full risk disclaimer, please refer to phillipnova.com.sg. This ad has not been reviewed by MAS.
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