Nikkei 225 Surges as US-Iran Ceasefire Lifts Sentiment and Oil Prices Drop

The Japanese stock market surged as investor confidence increased following the easing of geopolitical tensions in the Middle East. Nikkei 225 rallied in response to the US-Iran ceasefire announcement that diminished the threats of an extended Middle East war. This caused oil prices to fall rapidly which alleviated the inflationary pressures and global economic growth. This reversal improved risk sentiment and supported a strong move in the global equity market.

Ceasefire Eases Risks as Falling Oil Fuels Nikkei 225 Rally

The Nikkei 225 jumped more than 5% on Wednesday to close above 55,500. This rally keeps the door open for further upside on Thursday. The index continued its fourth consecutive rally session and finished above important resistance levels. This action indicates that there is a good buying interest back into the market. The news of the ceasefire was well received by investors as it reduced uncertainty about energy supply and international trade routes.

This rally was primarily driven by a decrease in the price of crude oil. With the low oil prices, many Japanese firms, particularly manufacturers and exporters, have lower cost of inputs. This enhances profitability and sustenance of earnings. Meanwhile, pressure on inflation decreases, and aggressive monetary tightening is not necessary, which also supports valuing equities.

Falling Yields and Improved Risk Sentiment Support Japanese Equities

Japanese government bond yields fell following a multi-decade high in the first part of the week. The 10 year yields fell as the investors moved away from the safe haven assets and returned to equities. This change indicates a positive development of confidence in the economic stability of the world after the ceasefire.

The wider market response also points to the extent to which the Japanese economy is interconnected with the global energy and geopolitical processes. The Strait of Hormuz is a key oil supply point and any instability can affect the oil imports in Japan. The presence of Pakistan as a mediator gave credence to the deal that boosted market confidence and aided the rally in equities, bonds and the currency.

Technical Outlook Signals Strong Bullish Momentum for Nikkei 225

From a technical perspective, the Nikkei 225 has formed a strong bottom at the 50,000 level. After forming this bottom, the index returned to bullish territory. The daily chart below shows that the rally in the Nikkei 225 on Wednesday has pushed the index within the ascending channel at the 55,000 to 56,000 zone.

However, the Nikkei 225 must remain above 56,000 on Thursday and Friday to sustain the bullish momentum. The index is now consolidating above the 50-day SMA, which indicates bullish momentum in the short term. As long as the 50,000 level holds, the next move in the index might be towards 60,000. Moreover, the RSI has pushed above the mid-level, which indicates another push higher in the short term.

The strong rally in the Nikkei 225 is due to the development of the rounding bottom pattern on the 4-hour chart. The chart shows that the price has compressed during the holiday period and pushed above 54,300 to rally towards $56,600 within the strong resistance band.

This strong surge after the price compression suggests a bottom development in the Nikkei 225, which indicates further upside towards 60,000. However, $55,600 and $54,300 remain the key support levels. As long as the 54,000 level holds, the Nikkei 225 is likely to maintain the bullish momentum in the short term.

Short-Term Development

The hourly chart below shows the short-term price action. The chart shows that the index is extremely overbought after a strong rally on Wednesday. The chart shows a strong surge after the U.S.-Iran ceasefire. If any breach of the ceasefire develops, the Nikkei 225 index may drop lower in anticipation of higher fuel prices. However, the recent development in the Nikkei 225 remains positive. The strong support on the hourly chart is pointed at the 53,000 to 54,000 zone in the short term.

Bottom Line

Nikkei 225 has developed strong bullish momentum as the global risk sentiment is driven by improving geopolitical conditions. The drop in oil prices relieved the pressure of inflation and the future of Japanese companies. The technical structure also favours additional upside, as the index is at key levels of support and trading above key moving averages. Nevertheless, the market remains subject to how well the ceasefire holds and any collapse would swiftly put a stop to the mood. If the ceasefire deal holds, the Nikkei 225 may continue to rally to 60,000 in the short term.