toyota motor faces potential downside pressure 1841362017

One of U.S. President-elect Donald Trump’s main priorities after inauguration day on 20 January 2016 is to focus on bringing manufacturing jobs back to U.S.

He has reiterated in his social media posts that he will review all the past trade pacts and rectify those that put U.S. at a disadvantage. This will be a major change in U.S. international trade policy where it focuses on the merits of globalisation/multilateralism in the past to a bilateralism approach that President-elect Trump’s administration tends to favour now where he hinted that U.S. will only seek cooperation with countries that are considered as “good partners”.

Donald Trump’s nominated key trade administration officials; Robert Lighthizer as U.S. trade representative and Peter Navarro as the head of a newly formed White House National Trade Council have further solidify his anti-globalization stance where both man are in favour of using trade tariffs to promote and defend U.S. industries.

Major export-oriented countries are now at risk for a slow-down in economic growth prospects if U.S. kick starts a trade war.  Thus in the medium-term (1 to 3 weeks), Toyota Motor (TSE: 7203) is likely to face downside pressure at this juncture. Key risk factors are as follow:

• The Trans Pacific Partnership (TPP) trade agreement between U.S. and several Asian countries which include Japan is likely to be rectified as Donald Trump has criticized the TPP as a “bad deal” and pledged to issue a formal notice of withdrawal from it on 20 January 2016. Japan’s main exports are motor vehicles which rank number one in terms of share of total exports (21.4%). In addition, a significant 40% of these vehicles exports go to the U.S. Therefore, a U.S. withdrawal of the TPP is likely to hurt the profit margins of Japanese motor vehicles manufacturers
• Mispricing – the recent 30% rally seen in the share price of Toyota Motor from the post U.S. presidential election low of 5784 on 09 November 2016 has been reinforced by the positive prospects of Trumponomics (aggressive fiscal policies and tax cuts) that drives up the revival of USD strength where a bullish USD/JPY creates a positive feedback loop in terms of sentiment for Japanese exporters. However, market participants have ignored the negative consequences of the withdrawal of TPP and the bar has also been set high on Trumponomics.  A continuation of vagueness on Trump’s proposed fiscal policies can disappoint market expectations easily and reverse some of the recent gains of Toyota Motor’s share price.
• Intermarket analysis – the USD/JPY which has a direct correlation with the movement of the Nikkei 225 is now right below a long-term descending trendline in place since April 1990 which also confluences with the key long-term resistance of 119.80. Therefore, any potential up movement on the USD/JPY seems to be capped at this juncture which translates to limited upside potential in share price of Japanese exporters.
• Technical charts of Toyota Motor – the recent up move from its June 2016 Brexit low is now right below a significant resistance of 7352. In addition, the daily RSI oscillator is capped by a significant trendline resistance at the overbought region that has coincided with previous major swing highs in price action. These observations suggest a slowdown in upside momentum where the stock price can easily stage a potential bearish reversal (refer to chart 1). In terms of relative performance, Toyota Motor has continued to exhibit negative elements that is likely to show further underperformance against the benchmark Nikkei 225 Index (refer to chart 2).

Therefore as long as the 7352 medium-term pivotal resistance holds, Toyota Motor may see a multi-week decline to test the 6223 support in the first step. A break below 6223 is likely to reinforce further downside pressure to target the key support of 5360 (the neckline of the bearish Head & Shoulders configuration and the major ascending trendline in place since November 2011 low).

However, a clearance above 7352 is likely to invalidate the bearish scenario to see a squeeze up to retest the major resistance zone of 8350/8783.

Chart 1 – Bearish technical elements seen in Toyota Motor

Source: eSignal (click to enlarge chart)

Chart 2 – Risk of further underperformance of Toyota Motor against Nikkei 225

Source: eSignal (click to enlarge chart)

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