Tech Rotation Presents a Buying Opportunity for the Nikkei 225
By Danish Lim Zhi Lin, Investment Analyst
Current Performance of SGX Nikkei 225
As of 22 July, the SGX Nikkei 225 September contract has slipped below the 40,000 level, hovering around 39,710 at around 11:04 SGT.
Much of the decline can be attributed to a stock rotation out of Tech and into cyclicals and small caps across the globe. Semiconductors & Semiconductor Equipment Makers, in particular, saw a rout after an explosive first half.
Nevertheless, we believe the direction forward appears to be aligning with our previous forecast of upcoming BOJ rate hikes and Fed rate cuts to translate into an eventual easing of yen depreciation pressure- supporting equity outperformance.
We maintain our price target range of 42,00 – 43,300, with a midpoint target at around 42,650.
Latest Developments
The tech rotation was kick started by US CPI data which came in lower than expected, as well as unemployment figures which were higher than expected. The readings essentially cemented a September rate cut, with Fed fund futures pricing in a 91.7% probability for a September cut. US Treasury yields tumbled, resulting in a weaker Dollar that helped ease Yen depreciation pressure.
Hawkish BOJ
Meanwhile, in Japan, calls for another rate hike increased after National Core CPI data for June came in higher than expected.
There was also a suspected intervention by the BOJ following the release of the softer than expected US CPI figures. On 11 July, the USDJPY currency pair plunged from 161.69 to as low as 157.44 in a little over half an hour, gaining more than 2% against the Dollar and prompting speculation that the BOJ had intervened in the market.
Regarding the suspected intervention, Chief currency official Masato Kanda said that he’s “not in a position” to comment on whether Japan had intervened and that “our practice is basically not to say whether we have intervened or not”.
Kanda also mentioned that “many see moves as one-sided, not matching fundamentals”, and that the BOJ doesn’t “see forex moves as stable”. Crucially he also spoke about the adverse impact of the weak yen on people’s livelihoods- as higher imported inflation resulted in a higher cost of living.
We interpret his comments as hawkish tilt for the BOJ. With the path of least resistance pointing to a rate hike in the coming months. Kanda mentioned that the BOJ will disclose at month-end if intervention was conducted.
Path Ahead
Going forward, we maintain our call for upcoming Fed cuts and BOJ rate hikes to eventually normalize Yen depreciation pressure. Dollar strength will ease while Yen will see a boost from rate hikes, easing Yen weakness and boosting domestic spending that should translate into improved performance for domestic-demand stocks. We believe this could offset waning momentum in Tech and serve as the next growth catalyst for Japanese equities.
We keep an eye out for real wages to turn positive, which could occur in the coming months once annual wage hikes are more fully reflected in the data. Should costs ease and wages continue to grow, we expect to domestic demand recovery to be the next key growth catalyst for Japanese equities.
We maintain our price target range of 42,000 – 43,300, with a midpoint target at around 42,650.
Nikkei 225 Outlook & Trading Opportunity:
In our opinion, we expect BOJ rate hikes and delayed FOMC rate cuts to eventually translate into an eventual easing of yen depreciation pressure.
This will support a Yen rebound to more comfortable levels- easing imported inflation and supporting consumer spending. We expect this to enable Japanese equities to sustainably outperform in 2H 2024. Corporate governance reforms should provide support for Japanese equities over the medium to long term.
We see any near-term weakness or pullback as an entry opportunity.
Expressing Our View:
We maintain our trade setup below to express our view:
Long SGX Nikkei 225 Index Futures
The daily chart shows the contract having slipped below the key 40,000 level and hovering near the 0.236% Fibonacci extension level around 39,225.
With a Trend-based Fibonacci Extension drawn from the October 2023 low, we set our target range between the 0.50% extension level around 42,000, and the 0.618% extension level around 43,300. Stop loss is set below the key support level at 36,650. This setup delivers a reward: risk ratio of 2.37x.
• Entry Level: 38,430 (previous entry level)
• Target Level: 42,650
• Stop Loss Level: 36,650
• Profit at Target: 3620 x ¥500= ¥2,110,000
• Loss at Stop: 1780 x ¥500= ¥890,000
• Reward: Risk Ratio: 2.37x
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 and stand to win a pair of air tickets to Japan. Learn more here.
*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
As of 22 July, the SGX Nikkei 225 September contract has slipped below the 40,000 level, hovering around 39,710 at around 11:04 SGT.
Much of the decline can be attributed to a stock rotation out of Tech and into cyclicals and small caps across the globe. Semiconductors & Semiconductor Equipment Makers, in particular, saw a rout after an explosive first half.
Nevertheless, we believe the direction forward appears to be aligning with our previous forecast of upcoming BOJ rate hikes and Fed rate cuts to translate into an eventual easing of yen depreciation pressure- supporting equity outperformance.
We maintain our price target range of 42,00 – 43,300, with a midpoint target at around 42,650.
Latest Developments
The tech rotation was kick started by US CPI data which came in lower than expected, as well as unemployment figures which were higher than expected. The readings essentially cemented a September rate cut, with Fed fund futures pricing in a 91.7% probability for a September cut. US Treasury yields tumbled, resulting in a weaker Dollar that helped ease Yen depreciation pressure.
Hawkish BOJ
Meanwhile, in Japan, calls for another rate hike increased after National Core CPI data for June came in higher than expected.
There was also a suspected intervention by the BOJ following the release of the softer than expected US CPI figures. On 11 July, the USDJPY currency pair plunged from 161.69 to as low as 157.44 in a little over half an hour, gaining more than 2% against the Dollar and prompting speculation that the BOJ had intervened in the market.
Regarding the suspected intervention, Chief currency official Masato Kanda said that he’s “not in a position” to comment on whether Japan had intervened and that “our practice is basically not to say whether we have intervened or not”.
Kanda also mentioned that “many see moves as one-sided, not matching fundamentals”, and that the BOJ doesn’t “see forex moves as stable”. Crucially he also spoke about the adverse impact of the weak yen on people’s livelihoods- as higher imported inflation resulted in a higher cost of living.
We interpret his comments as hawkish tilt for the BOJ. With the path of least resistance pointing to a rate hike in the coming months. Kanda mentioned that the BOJ will disclose at month-end if intervention was conducted.
Path Ahead
Going forward, we maintain our call for upcoming Fed cuts and BOJ rate hikes to eventually normalize Yen depreciation pressure. Dollar strength will ease while Yen will see a boost from rate hikes, easing Yen weakness and boosting domestic spending that should translate into improved performance for domestic-demand stocks. We believe this could offset waning momentum in Tech and serve as the next growth catalyst for Japanese equities.
We keep an eye out for real wages to turn positive, which could occur in the coming months once annual wage hikes are more fully reflected in the data. Should costs ease and wages continue to grow, we expect to domestic demand recovery to be the next key growth catalyst for Japanese equities.
We maintain our price target range of 42,000 – 43,300, with a midpoint target at around 42,650.
Nikkei 225 Outlook & Trading Opportunity:
In our opinion, we expect BOJ rate hikes and delayed FOMC rate cuts to eventually translate into an eventual easing of yen depreciation pressure.
This will support a Yen rebound to more comfortable levels- easing imported inflation and supporting consumer spending. We expect this to enable Japanese equities to sustainably outperform in 2H 2024. Corporate governance reforms should provide support for Japanese equities over the medium to long term.
We see any near-term weakness or pullback as an entry opportunity.
Expressing Our View:
We maintain our trade setup below to express our view:
Long SGX Nikkei 225 Index Futures
The daily chart shows the contract having slipped below the key 40,000 level and hovering near the 0.236% Fibonacci extension level around 39,225.
With a Trend-based Fibonacci Extension drawn from the October 2023 low, we set our target range between the 0.50% extension level around 42,000, and the 0.618% extension level around 43,300. Stop loss is set below the key support level at 36,650. This setup delivers a reward: risk ratio of 2.37x.
• Entry Level: 38,430 (previous entry level)
• Target Level: 42,650
• Stop Loss Level: 36,650
• Profit at Target: 3620 x ¥500= ¥2,110,000
• Loss at Stop: 1780 x ¥500= ¥890,000
• Reward: Risk Ratio: 2.37x
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 and stand to win a pair of air tickets to Japan. Learn more here.
*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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