The Sun appears to be shinning bright in the Land of the Rising Sun. After suffering a depressing sell-off last week, traders were starting to ask if the decline (which was sparked by China’s dismal GDP and Gold incredible slide) was an ominous sign of more selling to come for the Nikkei 225. This theory is not without basis after all – fundamentals from Japan continue to remain weak, as Japanese firms are not fully bought into the whole idea that the economy has recovered. This is what 5 cycles of recession does to you, and you tend to be a little bit cautious. Last month’s Tankan Survey was stuck in the red zone, while industrial production levels continue to shrink.
However, all fears are gone on Friday night, when Nikkei futures rallied strongly during European and and US hours, and we setting up Monday for a strong gap rally for the underlying actual stock index.
The underlying stock index did not disappoint, opening more than 250 points higher (+1.92%) safely clearing the previous high made on 11th April and jump start this week with a strong bullish bias which may well lead to even higher highs for the rest of the week if the bullish momentum continues.
However, the elephant in the room remains – what made Nikkei 225 futures trade higher after the underlying stock market has closed? It is also good to note that US and Europe futures/stocks did not enjoy the same rally that N225 had, so what gives?
If we examine closer, there wasn’t any bullish fundamental news last Friday. In terms of big hitters, we have German Producer prices and Canadian CPI, both of which shouldn’t have strong implication on N225 unless the numbers are way off expectations. With respect to domestic news, we have Japan Leading Index which came up slightly higher in Feb, clocking in at 97.6, 0.1 point higher than Jan’s reading. Again, this is no strong reason for market to rally. Using process of elimination, we are left with G20 meeting as the last plausible explanation for the rise.
Various Finance chiefs and leaders of G20 came out in support of BOJ actions. Far from condemning BOJ, G20 praised Japan for its efforts and commitment to bring itself out current depression. It is clear that G20 does not regard Japan as manipulating its currency. Facts be damned, the mere occurrence of Yen weakening by more than 20% is apparently ok by G20 standards. According to the G20, you are not allowed to talk about weakening currency to help your trade balance, but it is alright if you participate in currency weakening actions to boost your economy. Oh you mean the Yen is now weaker? Oops I didn’t mean it to happen. Collateral damages happen just so you know.
Whether we agree to G20′s actions (or lack thereof) with regards to Japan, speculators will be glad that there is scarcely any condemnation aimed at Japan. BOJ will be able to do whatever they want. As we have established earlier, N225 and also Yen has long decoupled from Japanese fundamentals. Speculators are simply buying up stocks and USD/JPY just because they believe in the free flowing stimulus packages that will definitely come in the future (if BOJ have their way, which they have implicit consent from G20 now). This would also mean that N225 and USD/JPY may be able to continue current rally for a while more.
From a technical perspective, the previous swing high of 13,615 will now act as a strong support against sell-offs. Price tried to breach the level earlier on but was quickly rebuffed. Stochastic readings suggest that a bear cycle may be in play now, however a confirmation of the 615 break may be necessary for the bear cycle to materialized. Even then, price may also find support above 13,500 which will allow for a retest of 13,615 and beyond especially if sentiment/speculation remains pointing to the upside. Another potential scenario may see price re-testing 13,615 and remain there for an extended period of time until an interim trough is formed. From there, prices may be able to embark on a fresh bull cycle which may potentially take us beyond current swing high of 13,700 and prepare us for more highs along the week.
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