The Nikkei 225 Index suffered a harsh reversal this week, its worst performance in months. It retreated by over 4.6%, mirroring the performance of other Asian stock indices as the war in the Middle East continued. So, is this the end of the strong bull run or an ideal buying opportunity?
Why the Nikkei 225 Index slumped
The Nikkei Index plunged as the war in the Middle East continued, leaving thousands of people dead and property worth billions of dollars destroyed.
This war will have a major impact on Japan, a country that has no major natural resources. It imports most of its oil from Middle East countries like Saudi Arabia and Qatar.
Crude oil prices have held steady this week, with Brent soaring to $84 and the West Texas Intermediate (WTI) jumping to $78. These benchmarks were trading below $60 earlier this year.
Therefore, there is a risk that many Japanese companies will spend more money on energy and shopping. Also, there is a potential challenge for supply chain disruptions, which will affect most manufacturers in the country.
Most notably, higher crude oil and natural gas prices will lead to strong inflation in the country, pushing the Bank of Japan to deliver more interest rate hikes. It has already delivered one rate hike this year, pushing that benchmark rate to the highest level in over 30 years.
The rising possibility of rate hikes explains why Japanese bond yields have continued rising this year. Data shows that the ten-year yield jumped to 2.15% this week from the February low of 2.04%.
Meanwhile, analysts are getting cautious about Asian stocks. In a note on Thursday, analysts at Morgan Stanley adopted a more cautious stance on Asian equities, pointing to the reliance on the Strait of Hormuz. The report said:
“Asia remains critically dependent on Middle Eastern supply of crude oil, refined products and LNG and we believe the market is too complacent about supply chain risks.”
Most companies in the Nikkei 225 Index were in the red this week. Kyowa Kirin, a top Japanese pharmaceutical company, was the worst laggard as it plunged by 20%. This retreat after the company discontinued its eczema drug citing safety concerns.
Sumitomo Pharma was the second-worst-performing company in the Nikkei 225 Index as it dropped by 18% this week. This retreat happened even after the company received a greenlight for its Parkinson’s disease.
The other top laggards in the index this week were companies like Hitachi Construction, Yokohama Rubber, Japan Airlines, Casio Computer, Mazda, and Nomura Holdings.
Nikkei Index technical analysis
The weekly chart shows that the Nikkei 225 Index retreated sharply this week. It retreated from a high of ¥59,286 to the current ¥55,485.
On the positive side, the index remains much higher than all moving averages, a sign that bulls remain in control.
It has also formed a bullish flag pattern, which is made up of a body and a long lower shadow. Therefore, the index will likely continue rising in the coming weeks. If this happens, the index will rebound and possibly retest the year-to-date high of ¥59,286.
This rebound will happen as signs of the war ending starts. A move above the YTD high will point to more gains, potentially to ¥60,000.
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