Nikkei under the pump as macro and technicals align

• Macro backdrop deteriorating as energy and fiscal risks build
• Technicals weakening with lower highs and soft momentum
• 51000 a key level that may determine the next move

Fundamentals and technicals are starting to align, and the message is clear: the Nikkei looks vulnerable to the risk of a deeper and more protracted unwind.

Looking at correlations over the past week, it suggests the index remains at the whim of developments in the Middle East. The extremely strong positive relationship with global equities, proxied by Vanguard’s Total World ETF, and S&P 500 futures remains across timeframes, while the inverse correlation with VIX has firmed noticeably.

Source: TradingView

But what stands out is the sensitivity to energy and rates. The relationship with Brent and long-end JGB yields highlights how exposed the Nikkei has become to swings in energy prices and the broader macro backdrop.

It’s essentially a risk indicator with Japanese characteristics, driven by sentiment around energy.

And that’s where the fundamental vulnerability sits.

As outlined in our Q2 USD/JPY outlook guide, higher oil prices driven by the Iran conflict are hitting Japan’s terms of trade, lifting import costs, squeezing margins, and raising concerns about the fiscal outlook, and that’s even before the potential for a sustained energy supply shock is considered.

For an equity market dominated by export-heavy industrials, it’s not a great mix. And that’s being borne out on the charts.

Source: TradingView

51000 is the line in the sand for Nikkei bulls. Defend it, or risk enticing more participants into the unwind already seen.

We’ve seen multiple bearish break attempts in March, all of which have failed. But the telling thing is the string of lower highs from bounces, sequentially failing around the 50DMA and, more recently, ahead of 54000. The index looks heavy.

RSI (14) is yet to set lower lows but remains below 50, indicating downside pressure remains in the ascendancy, a signal backed up by MACD which is motoring lower in negative territory.

Risks are therefore tilted to the downside, but they are unlikely to be acted upon until we see a definitive break, ideally accompanied by a close. Otherwise, it risks being just another failed break, potentially paving the way for a retest of sellers parked above 54000.

A sustained break of 51000 would allow for a stop to be placed above the level for protection, targeting the intersection of 48500 support and the 200DMA.