Nikkei 225 Breaches 41,000- Where Next?
By Danish Lim Zhi Lin, Investment Analyst
Current Performance of SGX Nikkei 225:
As of 9 July, the SGX Nikkei 225 September contract briefly topped the 41,000 level, gaining 1.32% as of 11:01 SGT. The movements tracked overnight gains in US semiconductor shares, as investors remain optimistic ahead of Powell's semi-annual testimony to congress and inflation readings later this week.
As of 10:35 SGT, gains were led by Fujikura Ltd (+11.66%), Tokyo Electron (+3.88%), Advantest (3.17%). This comes ahead of TSMC's earnings results next week, where it is widely expected to post an earnings beat and raise guidance.
We maintain our previous thesis of BOJ rate hikes and delayed FOMC rate cuts to translate into an eventual easing of yen depreciation pressure- supporting equity outperformance. We update our price target to a range of 42,00 – 43,300, reflecting updated information. This puts our target price at the midpoint of the range at around 42,650.
BOJ Hike in the Cards:
Government data released Monday showed that Japanese workers saw their average base pay climb 2.5% YoY in in May, the fastest pace in 31 years; and higher than the headline figure which grew 1.9%. Overtime wages, a leading indicator of labour demand, grew by 2.3% YoY.
This comes as this year’s “shunto” wage negotiation was able to secure an average wage increase of 5.1%, the largest since 1991.
However, on an inflation-adjusted basis, real wages continue to lag behind inflation, as real cash earnings fell by -1.4%, in negative territory for the 26th straight month. We believe falling real wages further highlights the need for the BOJ to tighten monetary policy.
At the same time, the BOJ’s June Tankan Survey indicated that corporate sentiment improved, with all-firms current sentiment index unchanged at 12, while the forecast index ticked up to 10 from 9 in March. Sentiment among both manufacturers and non-manufacturers also improved.
Thus, we believe the improvement in wages will give the BOJ confidence that the wage-price cycle they seek could be emerging, giving room for the BOJ to normalize policy. This could help ease yen depreciation pressure- which has weighed on consumer sentiment and spending due to higher imported inflation.
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. The BOJ said it forecasts private consumption to recover in the coming months after 4 quarters of decline, underpinning an economic recovery.
Should costs ease and wages continue to grow, we expect to domestic demand recovery to be the next key growth catalyst for Japanese equities.
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 broken above the 0.382% Fibonacci extension level and has been hovering around psychological resistance at 41,000.
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
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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 9 July, the SGX Nikkei 225 September contract briefly topped the 41,000 level, gaining 1.32% as of 11:01 SGT. The movements tracked overnight gains in US semiconductor shares, as investors remain optimistic ahead of Powell's semi-annual testimony to congress and inflation readings later this week.
As of 10:35 SGT, gains were led by Fujikura Ltd (+11.66%), Tokyo Electron (+3.88%), Advantest (3.17%). This comes ahead of TSMC's earnings results next week, where it is widely expected to post an earnings beat and raise guidance.
We maintain our previous thesis of BOJ rate hikes and delayed FOMC rate cuts to translate into an eventual easing of yen depreciation pressure- supporting equity outperformance. We update our price target to a range of 42,00 – 43,300, reflecting updated information. This puts our target price at the midpoint of the range at around 42,650.
BOJ Hike in the Cards:
Government data released Monday showed that Japanese workers saw their average base pay climb 2.5% YoY in in May, the fastest pace in 31 years; and higher than the headline figure which grew 1.9%. Overtime wages, a leading indicator of labour demand, grew by 2.3% YoY.
This comes as this year’s “shunto” wage negotiation was able to secure an average wage increase of 5.1%, the largest since 1991.
However, on an inflation-adjusted basis, real wages continue to lag behind inflation, as real cash earnings fell by -1.4%, in negative territory for the 26th straight month. We believe falling real wages further highlights the need for the BOJ to tighten monetary policy.
At the same time, the BOJ’s June Tankan Survey indicated that corporate sentiment improved, with all-firms current sentiment index unchanged at 12, while the forecast index ticked up to 10 from 9 in March. Sentiment among both manufacturers and non-manufacturers also improved.
Thus, we believe the improvement in wages will give the BOJ confidence that the wage-price cycle they seek could be emerging, giving room for the BOJ to normalize policy. This could help ease yen depreciation pressure- which has weighed on consumer sentiment and spending due to higher imported inflation.
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. The BOJ said it forecasts private consumption to recover in the coming months after 4 quarters of decline, underpinning an economic recovery.
Should costs ease and wages continue to grow, we expect to domestic demand recovery to be the next key growth catalyst for Japanese equities.
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 broken above the 0.382% Fibonacci extension level and has been hovering around psychological resistance at 41,000.
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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