The Nikkei, Japan’s benchmark stock index, continues its impressive run in 2024, reaching yet another 34-year peak. With the yen teetering towards the closely watched 150 per dollar level, the Nikkei shows no signs of slowing down. This year alone, the index has breached multi-decade highs almost every other day, inching closer to its all-time high of 38,957, which was last seen on the final trading day of 1989. On Tuesday, the Nikkei hit 37,930, its highest level since February 1990, and is set to register a remarkable 13% gain for the year. These impressive gains come on the back of a 28% surge in 2023, making the Nikkei Asia’s best-performing major stock market.
The investment thesis for Japanese equities remains the same – low valuations and corporate governance reforms have made the market attractive for foreign investors. Despite the inflow of 6.3 trillion yen ($42.1 billion) into Japanese stocks last year, international investors continue to find opportunities in the market. Furthermore, strong earnings results this year have added to the appeal of Japanese equities.
One factor impacting the Nikkei’s rise is the weakening yen. As the Japanese currency approaches the key 150 per dollar level, authorities have started to express concerns about its decline. The value of the yen has a significant impact on Japan’s export-oriented economy, and a weakened currency makes Japanese goods more competitive in global markets. Therefore, the market will be closely watching any measures taken to stabilize the yen and its potential impact on the Nikkei’s performance.
With China closed for the Lunar New Year holiday, trading in Asia is expected to be subdued. However, market activity may pick up as investors turn their attention to Indonesia, where elections will be held on Wednesday. These political developments could potentially create market volatility.
In Europe, futures markets indicate a lackluster start to the day as investors consider taking profits after the pan-European STOXX 600 index reached a two-year high.
The U.S. inflation report is expected to be the highlight of the day. This data will provide insights into the direction of interest rates. While traders have adjusted their expectations, now anticipating 111 basis points of rate cuts from the Federal Reserve, the market consensus is that the central bank will commence an easing cycle. The inflation report will shed light on the timing of such rate cuts.
Before the U.S. inflation report, attention will be focused on the UK average weekly wages data. This information will be crucial in assessing the health of the labor market and determining whether inflationary pressures are subsiding. The Bank of England has been firm in its stance, maintaining that inflation is significantly above its 2% target, making a premature rate cut a risky proposition. Moreover, the British pound has caught the attention of carry traders, adding another layer of complexity to monetary policy decisions.
Overall, the Japanese benchmark’s relentless climb, coupled with international investors’ interest and the weakening yen, indicates an optimistic outlook for Japanese stocks. However, developments in the global economy and upcoming economic data releases will play a crucial role in shaping short-term market sentiment.
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