nikkei 225


Asian stock indices plunged last week including the Nikkei 225 falling from around 17,700 to end the week at 16,819.59. Japanese equities have made several attempts at rallies and this time was supported by stimulus measures from the Bank of Japan with their latest move to negative interest rates. However, optimism over central bank stimulus, which usually leads to a large reaction translating into higher stock prices, has so far failed to spark a sustainable rally in the Nikkei 225 index.

Using data since 1989, the average length of a bear market is 161 trading days for the Nikkei 225 index. Investors have used the recent 5% gain in the Nikkei 225 following the Bank of Japan’s surprise decision as a selling point. The volatility in the index was not fundamentally justified over the past four weeks but since it has been extreme sentiment has been damaged and could see bears in the market emboldened.

Moreover, a strengthening Dollar has positively affected the Nikkei 225 index which historically has a strong positive correlation with USD-JPY. USD-JPY closed below 117.00 last week and if the bearish momentum continue we should see Nikkei 225 react positively again to a strengthening US Dollar. However, if the US Dollar weakens then this would be bearish for the Nikkei 225 index.

In a bullish development for the US Dollar and therefore the Nikkei 225 index, the Federal Open Market Committee member Mester stated that despite the current volatility in financial markets and deflationary pressures, this should not keep the US central bank from raising interest rates. More hawkish comments from Janet Yellen, John C. Williams and William Dudley this week could provide more bullish momentum for the Nikkei 225.

A low reading for the Domestic Corporate Goods Price Index on Tuesday (23:50 GMT) would be bullish for the Nikkei 225 index and vice versa. The forecast for the annual growth in this price index is -2.8% and -0.7% for the monthly growth rate. Larger contractions in manufacturing costs and inflation would be positive for stock prices and bearish for the Yen and therefore more negative readings are expected to increase buying interest in the Nikkei 225.

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