Nikkei buckles under the pressure of tech selloff, stronger yen

APAC indices are turning lower as Thursday's weak ISM manufacturing report is ringing recessionary bells, a day after a dovish Fed meeting and on the eve of a key nonfarm payrolls report. And with Trump amid a very public, campaign-burning meltdown, the Trump trade is being read its last rites. A soft landing is no longer assured. Not only did the headline PMI number contract at its fastest pace in eight months, but employment and new orders also contracted at a faster pace.

What really caught my eye about the latest ISM report is how many negative comments there are from respondents. I would go as far as to say it is the most deflationary and recessionary set of comments I have seen in the report for quite some time. And this makes today’s nonfarm payroll and Monday’s ISM services report all the more important. Because if they deteriorate more than expected, it suggests the Fed may have broken something after all and their rate cut/s are arriving too late. And if the US enters a recession, chances are so does the rest of the world.

Nikkei 225 technical analysis:

We can see that Nikkei futures are tumbling alongside USD/JPY and the Nasdaq, which makes sense as the US-JP 2-year differential is narrowing thanks to a dovish Fed and relatively hawkish BOJ. And the tech sell-off which weighs on the Nasdaq is being fully embraced by the tech-savvy Nikkei.

The stronger yen is benefiting from hawkish BOJ bets and safe-haven flows, forcing the Nikkei down to a near 5-month low, which has fallen -15% in just 16 days. It has also broken beneath its 200-day average, and at -4% down for the day amid its worst day since the pandemic.

However, bears may want to warrant caution around current levels. The Nasdaq 100 is holding above the May high and support on Nikkei futures resides around the high-volume node (HVN) at 35,850.

The upside risk to Wall Street (and therefore the Nikkei) is if NFP data comes in strong, as this could prompt a bounce off said support levels. But if we factor in the bearish momentum from the July high, it is too soon to say the market cannot go lower from here after any potential bounce. Market positioning also suggests there could be further downside in the coming weeks or months, especially if the yen continues to strengthen.

Asset manager exposure to Nikkei 225 (in yen, CME futures)

Whilst traders remain net-long Nikkei futures, their bullish exposure has been trending lower since Q2 2023. And as we’ve seen Nikkei futures hit record highs recently, it suggests prices still have some catching up to do regarding the diminishing net-long exposure of asset managers. In turn, this suggest we could be looking at a lower Nikkei in the coming weeks or months. Also note that they have essentially derisked in recent weeks by reducing both long and short exposure.

However, the Nikkei is currently lower for a third week due to a combination of risk-off trade and a stronger yen. So perhaps the selloff is becoming stretched to the downside over the near term and in need of a bounce before its next leg lower.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge