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NIKKEI INDEX STRUGGLING TO ADVANCE

DAVID MORRISON<br /><strong>CFD MARKET STRATEGIST, GFT</strong><br /><br />WHILE US stock indices look relatively buoyant, there are a number of major global markets that are currently struggling to make further headway.&nbsp; In Europe, the French CAC 40,&nbsp; Spanish Ibex and German Dax are trading in tight ranges and failing to break above resistance at significant retracement levels. Meanwhile, despite being seen as the area least affected by the worldwide slowdown, Asia-Pacific markets are a mixed bag and seem to be tiring. <br /><br />But there is one chart that doesn&rsquo;t just look worn out, it&rsquo;s hanging off the ropes. The Japanese Nikkei 225 fell to a four-month low last week, and even after yesterday&rsquo;s bounce, the chart is still looking grim. From a technical point of view, there is a downward-trend channel emerging and the intraday low made just a few days ago exceeded the previous low point made back in July. This suggests further weakness ahead.<br /><br />The Nikkei has diverged quite dramatically from the US S&amp;P 500 over the past three months, coinciding with a change in government when the Liberal Democratic Party, which had held power since 1955, was ousted by the Democratic Party. It also coincides with the rising cost of credit default swaps (CDS) on Japan&rsquo;s sovereign debt.<br /><br />From a fundamental standpoint, Japan is in a terrible state. The country's massive national debt (200 per cent of GDP) and ageing population weigh on investors' minds. Japan has real issues in being able to pay off the interest on its existing debt, and the danger is that as yields creep higher the problem gets more acute. Although the country&rsquo;s debt issuance is set to rise dramatically, it won&rsquo;t be met with increased demand as the domestic savings market shrinks. Yields will have to rise to compensate, and rising yields means servicing the debt becomes ever more expensive.<br /><br />A weaker currency in this scenario would help, yet despite an interest rate of 0.10 per cent the yen continues to strengthen. The currency hit a 14-year high against the dollar last week and many analysts are looking for the yen to strengthen further. This is doing tremendous damage to Japanese exporters and the manufacturers who have driven the recovery so far.<br /><br />Japan might be the second largest economy in the world, but its outlook is bleak and is a lesson for us all.