The Japanese stock market sent a clear signal to Western investors on Christmas Eve, and it certainly wasn't optimistic. It experienced one of the biggest drops in recent years, a decline that will undoubtedly affect stock markets across Europe, including Spain. This downward spiral is unprecedented in recent months and even trading years. It's enough to make you fear the worst, according to some of the most experienced investors in the markets.
This drop in Japanese equities was preceded by another sharp fall on Wall Street . The words of the head of the US Federal Reserve (Fed) have not been well received by various financial players regarding the monetary policy to be implemented across the Atlantic. Even President Donald Trump has had to intervene given the way events are unfolding in these extraordinary times.
In any case, one thing is certain for small and medium-sized investors: this year they won't see the expected holiday rally . Well, there will be a rally, but one with a marked downward trend, with an intensity rarely seen in recent months. To the point that most international stock markets are expected to end December with losses of around 10%, and in some markets even more. In short, a far from promising outlook for the powerful stock market investment sector.
The Japan Stock Exchange gives the notice
The Nikkei, an index comprising the 225 most representative stocks on the Japanese market, fell by just over 5% this Monday, dropping to 19.155,74 points. This broke the important and psychologically significant 20.000-point level and is its lowest point since April 25th of last year. Worse still, the Japanese stock market index has entered a dangerous downward trend, the extent of which remains unknown in the coming months or even years.
From this general scenario focused on the Far East , it is known that this tremendous single-day decline is the most pronounced since November 9, 2016, the date of the US elections that brought Trump to the presidency. But the most important aspect is the domino effect this drop in Japanese equities could have on other markets closer to Spain, in a year that is about to end and from which absolutely nothing can be expected.
It will affect the European stock markets
Meanwhile, the Topix , a broader index than the Nikkei 225 that includes two thousand companies with the largest market capitalization, fell by 4,88%. That's almost 75 points, indicating the extreme severity of these movements in the financial markets. In a way, they were unexpected due to their particular intensity and virulence in the declines experienced right at the start of the Christmas holidays. Now we will have to wait and see how European equity markets respond, although nothing good is expected. Not at all.
It's worth noting that the year is almost over for European stock markets. Only two trading sessions remain: today, Thursday, and tomorrow. While Western stock exchanges will open on New Year's Day, they will only be open for half a session, similar to what happened on Christmas Eve. However, small and medium-sized investors fear the worst, anticipating a mass exodus of investors who will prefer to remain in a position of absolute liquidity , despite the somewhat contradictory advice being offered by some financial intermediaries.
Reasons for this reaction
Analysts attributed today's decline in Tokyo to those same lingering tensions, as well as the renewed attacks by US President Donald Trump against Federal Reserve Chairman Jerome Powell . But it seems the causes run even deeper, and all indications point to a recessionary scenario being priced into international economies for the coming years. This goes beyond other technical considerations and may even be influenced by the fundamentals of stock market values.
In any case, one thing is certain: growth in the major international economies will be lower than that of the current economic cycle, which is just days away from ending. Indeed, the revisions being made by all international organizations point in this direction, with downward revisions to economic forecasts starting this year. While there are no indications of a particularly large-scale economic crisis at the moment, there are some very worrying signs.
The Japanese economy is doing well
This reaction from Japanese stock markets is inconsistent with the statements of Japanese Prime Minister Abe . He claims that the Asian economy is in excellent health and that all economic indicators are under control. So why has the Japanese stock market experienced this drop in the value of shares traded on financial markets? The causes can be found in exogenous rather than endogenous factors, with the US Federal Reserve's interest rate hikes playing a significant role, especially in today's globalized world.
Therefore, the stock market in this country is reflecting a new monetary policy scenario that could also impact its own economy. Consequently, investors in this region have decided that now is the crucial time to take profits and maintain liquidity in anticipation of what may happen from this point forward. This is especially true given the deterioration in the technical outlook for its main stock market indices in recent hours.
Levels at 20.000 points
Nor is it insensitive to the fact that the Nikkei has broken through the significant support level of 20.000 points. This could trigger a continuation of the decline, potentially reaching an unprecedented level. It's important to remember that this financial market has experienced substantial gains since 2013 , and it's natural to expect sharp corrections to adjust to the laws of supply and demand. However, the most concerning aspect is that it has broken the short- and medium-term upward trend line that it held until just a few days ago.
In practice, this means we'll have to get used to seeing declines in this internationally significant financial market. Although trading by small and medium-sized investors is still minimal, despite a time when its technical outlook encouraged investment across all risk profiles, there's no doubt that this strategy will need to be rethought, and new models for maximizing returns on available capital will be sought.
Trade war between the powers
Beyond other technical considerations, there is no doubt that the potential trade war between the United States and China could intensify the declines in the Japanese stock market in the coming weeks. It is, after all, one of the financial markets most exposed to this scenario arising from this trade conflict. To such an extent that its stock market could be much more negatively impacted than those of Western countries, and specifically those of the old continent.
Therefore, caution should be the guiding principle in your actions regarding Asian market equities. At the moment, you have far more to lose than to gain. This is not a market where you should invest your savings, as the risks are significantly higher and making purchases in this financial market is not worthwhile. This is especially true after it broke through the important 20.000-point level, as we discussed earlier.
In any case, it will be necessary to pay special attention to its behavior in the first days of the new year that is about to reach all investors. They can give some other signal about the movements that this bag can take so far from ours. Although the forecasts are not at all favorable for a positive resolution on further rises in the Japanese stock market. In this sense, the most advisable thing is to be out of this relevant financial market, even if there are strong rebounds in the valuation of the shares of Japanese companies. So that in this way, savings can be more effectively protected, which is ultimately what it is all about.