Market Opinion Equities

Equities Still Like The Nikkei

As we write this article, Prime Minister Koizumi has a commanding lead in the polls, which would allow him to win the election and retain power with the LDP’s coalition partner, New Komeito. However, there are risks. 40% of voters are still undecided, while the DPJ opposition party has made up some lost ground over recent weeks.

Still, a Koizumi victory is to be expected. Key for the markets will be the number of seats gained in the Lower House. Currently holding 283, the LDP/New Komeito coalition will want to achieve at least 250 seats so as to ensure continuation of the reform process, and the passing of the postal privatisation in particular. In fact, an LDP victory could even drive the reform process that much harder, given that 37 lawmakers that previously opposed the postal bill have been replaced by close allies of Prime Minister Koizumi.

As a result, Koizumi’s gamble could well lift the Nikkei higher. The strong end of week close at 12,692 is positive on a technical basis, and we are sticking with our long-held view of appreciation towards the 15,000 region. A further short-term boost could come from Monday’s revision to Q2 GDP, with expectations for an upward revision to 1.5% y-o-y, from the previously reported figure of 1.1%.

Indeed, better than anticipated machinery orders, bank lending growth turning positive and another encouraging assessment of the economy by the BoJ are signs that the Japanese economic revival may prove more sustainable than previous false dawns. This will provide underlying support too for the yen, and, therefore, given our bearish medium-term view of the euro, we expect the EUR/JPY to decline over the coming months.

The risk to the yen and the Nikkei is that too much optimism has been priced in, meaning that speculators may unwind long positions should there be any disappointment with regards to the election result. However, as for the Nikkei, any short-term downside should meet support at 12,400, with major levels below at 12,100 and 11,900 on a more significant retracement.
Another stock market that we like on a long-term basis is the Nasdaq. The view is purely technical. The picture painted by the monthly chart is one of a market that can push much higher over the coming years. Any move above the 2,220 level could open up gains towards 2,800. Major long-term support exists at 1,980.

As for the FTSE, it is still showing upside potential. However, for the uptrend to resume, it needs to break through resistance in 5,370-5,380 area.

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