Nikkei hitting 30,000

Japan’s Nikkei has rallied above 30,000 index points for the first time since 1990. At the time markets were shocked by the Iran invasion of Kuwait. This later on led to a seven-month-long occupation of the country and eventually caused the Gulf War to erupt. Nikkei had topped in December 1989 at 39260 index points and kept on sliding until it bottomed in 2012 and started to rally in 2013. While the collapse started with a banking crisis in 1989 the current rally has been fuelled by another kind of crisis. Coronavirus pandemic has prompted massive liquidity injections to the economies by the central banks and this has meant the stocks have moved in one direction only: Up. By reading further you agree with our disclaimer at the bottom of this page and acknowledge that we do not provide investment advice.

Even though the Bank of Japan has been over the years trying to create a wealth effect by first buying Japanese stocks through ETFs this steepest phase in the rally started in April 2020 as it was clear that the central banks have to step up their QE game due to the coronavirus pandemic. The index has risen 80% in about 10 months. According to Bloomberg, the BOJ became the biggest owner of Japanese equities in July 2020. This shows how, just like in the late 1990s, in the US tech stock bubble fundamentals are not the reason for the high prices but a buying mania created by some deep-pocketed buyers. In the late 1990s, it was the investment funds doing the buying. Now it this buying frenzy fuelled by another group of investors with even deeper pockets, central banks. This bubble created by central bank money must burst at some point. This point is likely to come when central banks start tapering their QE and investors realise that the only reason the valuations are this high is the cheap money created by the central banks. Each and every free market needs new inflows of funds in order to keep on rising. Once those central banks originated inflows start to dry up it’s time for the investors to run for the hills.

Bitcoin more widely accepted

Last week the oldest bank in the US, the Bank of New York Mellon said that it will start financing bitcoin and other digital currencies. According to CNBC, the bank will eventually allow digital currencies to pass through the same financial system the bank is now using for US T-bonds and equities. Another big name expressing their interest in bitcoin is Morgan Stanley $150 billion investing arm Counterpoint Global. The firm said over the weekend that they are considering adding bitcoin to their portfolios. This would need to be approved by the regulators and therefore may take time but both these examples show how bitcoin is gaining traction among traditional investors. Bitcoin is now trading near the 50K dollar mark. 

Crude oil rallying again

Fighting in the Middle-East and cold weather in Texas have prompted new buying in crude oil. The price of oil is trading in 13-month highs at the time of writing this. Reuters reported today that Saudi coalition fighting Iran backed Huthi rebels destroyed a drone that carried explosives. The drone was directed toward the Saudi kingdom and the news triggered further buying in oil. There have also been supply concerns due to the cold weather in the US and especially in Texas where some wells have been shut down. Road transport problems and power outages caused by the cold weather front have also played a part in creating supply interruptions. 

USD weakness as bond yields rise outside of the US 

Wednesday last week we alerted TIOmarkets traders to a potential reversal in USD pairs. You can see the video here! We pointed out that there was a loss of momentum that suggested weakness in the EURUSD and Cable and strength in USDJPY. This is exactly what happened. Both EURUSD and GBPUSD corrected a little lower and USDJPY has been now rallying from the time of our analysis. What about this week? There has been some talk of market participants once again focusing on factors that are likely to cause the USD to weaken. Real yields in the US aren’t attractive enough to keep the dollar bid. Instead, the markets focus once again on the massive stimulus ahead. Due to the coronavirus situation, we’ll probably see more growth outside the US over the coming months. This expectation shows up in higher yields on government debt outside the US. As investors sell government bonds e.g. in the UK, they make a bullish bet for the economy and by doing so force the bond yields higher. This is turn attracts international money flows and UK Sterling can appreciate against the USD. 

Busy week ahead for risk event traders

Monday and Tuesday are mostly void of significant economic releases, or risk events are they are also called. The President’s Day in the US keeps the market quiet today and the only event that could create some significant activity on Tuesday is the RBA monetary policy meeting minutes. Wednesday we’ll have the UK and Canadian CPI numbers and US retail sales together with the FOMC meeting minutes in the evening European time. Thursday starts with Australian employment data and later on US unemployment claims and the Philly Fed manufacturing index hopefully provide us with some market volatility. The PMI numbers from the UK, EU, France, Germany and the US are due on Friday making it the most likely day for increased volatility and hopefully a higher number of trading opportunities. Deposit now to make sure you are prepared to take advantage of these risk events! See our economic calendar for times and details.

EURUSD lost momentum last week and then had a down day on Friday. Buyers, however, stepped in at 1.2082 bringing the pair again almost to the 50-period SMA. The pair is now trading near last week’s high (1.2150) which obviously is a resistance level. We also have the 50% retracement level coinciding with the level. The weekly uptrend is still intact but due to market now trading near a resistance level a small correction before the uptrend can continue wouldn’t be a surprise. The key support levels are last week’s low (1.1952) and Friday’s low (1.2082). The 1.2053 level coincided with the 23.2% Fibonacci retracement and a downward sloping trendline should be monitored if the pair moves to the level. Resistance levels at 1.2150 and 1.2189 are likely to be quite important this week. If the market can push through both then it is likely to test levels near the 1.2350 high. Open a VIP Black account with us. There are no per trade execution or monthly fees on our VIP Black accounts.

GBPUSD has been strong since it broke the 1.3760 level. We suggested in last week’s video (here) that the pair might retrace back to 1.3760 support level but it would be likely that buyers would step in at the level. Buyers started bidding the Cable 15 pips higher which obviously is very bullish. Last week on Monday we said that a move above 1.3760 could develop a decent 200 pip swing. At the time of writing this Cable has rallied approximately 150 pips from the level. The bull channel high is currently at 1.3963, i.e. about 50 pips higher than the current level. The key support levels for GBPUSD are 1.3760 and 1.3869. Open a VIP Black account with us. There are no per trade execution or monthly fees on our VIP Black accounts.

Last week we alerted our traders to an opportunity in USDJPY (see here). We said that the pair was trading at support and that there was buying coming in and saw a move to 105.50 – 105.55 region as being likely. USDJPY rallied from the 104.40 support level and has traded today at 105.41 before some profit-taking. USDCAD and USDCHF have been weak and with the bond yield rising outside the US longs are much riskier at current levels compared to USDJPY trading at 104.40 last week. USDJPY has strong over the past few days but should the market create a lower high below 105.77, then the 104.40 support is at risk. Should the JPY weakness against the dollar continue to such extent that we’d see a sustained rally above the 105.77 resistance level, then the next resistance area lies at 106 (50-week SMA) and 106.22 (50% retracement level). 

The recent rally above the 30K mark has taken Nikkei to the upper end of the recent bull channel. There is a significant sideways pattern just below 28980. This level is an important support level after it resisted price advances for a month. At 28840 we have also a former resistance level that coincides with the 50% retracement level and the 20-day SMA. Other significant support levels are 27576, 29166 and 29587.

Bitcoin is trading near to a 50K level and slightly above its 20-day SMA. The recent news about wider adoption of cryptocurrencies have been supportive and as long there is no detrimental news flow on regulatory risks etc., retracements to significant supports are likely to be treated as buying opportunities. January 8th high at 42145 is one of the major support levels. Below this, we can see the 50-day SMA and rising trendline support at 35890 – 36480. A break below the rising trendline would be negative and could lead to consolidation with lows around the 30K level

You may access the times and dates in the economic calendar here.

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Trade Safe!

Janne Muta
Chief Market Analyst
TIOmarkets.com

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