Nikkei’s Rally Pauses for Breath with Record High in Sight (Update 1)

Reuters

13:03 JST, February 20, 2024 (updated at 16:30 JST)

TOKYO (Reuters) – Japan’s benchmark stock index struggled for traction on Tuesday, remaining stuck this week some 1% below the all-time peak set over three decades ago, with traders wary ahead of Nvidia earnings that could test the chip sector’s AI euphoria.

China’s unexpectedly large rate cut gave Japanese stocks a boost in the morning session, but it proved to be short-lived, and the Nikkei share average ended the day down 0.28% at 38,363.61.

The Nikkei is on the cusp of breaking its all-time high of 38,957.44, set on the final trading day of 1989 at the peak of Japan’s bubble economy. On Friday, the benchmark index pushed as high as 38,865.06 before pulling back into the close.

Japan’s chip-sector giants have been a driving force of the Nikkei’s nearly 15% surge this year, handily outperforming major peers, including the U.S. S&P 500 .SPX and tech-focused Nasdaq Composite , which have gained about 5% each.

Chip-testing equipment maker Advantest, for example, which counts Nvidia among its customers, has soared 40% in 2024, despite sagging 1% on Tuesday.

Tech was a mixed bag overall, with Advantest-peer Lasertec sliding 1.7% and chip-making equipment giant Tokyo Electron slipping 0.4%, while chip maker Renesas climbed 2.1%. AI-focused startup investor SoftBank Group lost 0.1% after earlier gaining as much as 2.5%.

Nvidia reports financial results on Wednesday.

“With Nvidia’s earnings announcement looming, it’s extremely difficult for investors to move,” said Kazuo Kamitani, an equities strategist at Nomura Securities.

“For Nvidia of course, and for Japanese stocks as well, there’s some feeling of overheating, so a dip would be natural, but with expectations so extremely high, it’s not going to decline so easily.”

A measure of momentum called the relative strength index (RSI) sits at 73.9 for the Nikkei, and has been above the 70 line signaling overbought conditions for more than a week.

However, the Nikkei volatility index has retreated sharply from the one-month high reached on Friday.

“It’s just a matter of time for the Nikkei to break the record high given the change in the trend of the Japanese economy,” with wages rising, and companies able to pass on costs through price increases, said Masayuki Kichikawa, chief macro strategist at Sumitomo Mitsui DS Asset Management.

“I think there is a good chance that the Nikkei could break the record in coming weeks, but it depends on how U.S. equities behave.”