Nikkei 225 Index at risk as US-Iran war takes a new twist

The Nikkei 225 Index dropped to a crucial support level on Monday as energy prices soared, with the US-Iran war taking a new twist during the weekend. It retreated to a low of ¥50,557, down by over 13% from its highest point this year.

Japan stocks drop as US-Iran war takes new turn 

The Nikkei 225 Index dropped substantially as the Iran-US war took a new twist during the weekend. In a major event, Yemen's Houthi rebels joined the war and started firing rockets towards Israel.

Their entry is notable because it will help to reduce Israeli defenses in the coming weeks. Most importantly, the group may decide to shut traffic in the Red Sea, a move that will push energy prices higher in the near term.

Crude oil prices continued rising on Monday, with Brent soaring to $116 and the West Texas Intermediate (WTI) rising to $101. Analysts are now predicting that Brent will jump to over $200 in the coming weeks, especially if there is no de-escalation in the region.

In another twist, thousands of US troops have started arriving in the Middle East, and in a report, the Washington Post noted that the Trump administration was considering launching a ground operation in the country.

Japan is highly exposed to the soaring enemy prices because it imports most of its oil from the Middle East. As a result, analysts believe that Japan’s inflation will continue rising in the coming months.

At the same time, the Japanese yen has crashed, with the USD/JPY exchange rate moving to 160. It has jumped by over 5% from its lowest point this year.

As a result, foreign investors have continued dumping Japanese stocks. These investors have dumped stocks worth billions of dollars in the past few months, a sign that the panic is continuing.

Japan bond yields have continued rising in the past few months, with the ten-year rising to 2.38%. The five-year yield has also soared to over 1.8%.

The next key catalyst for the Nikkei 225 Index will be the upcoming Japan macro data, which will come out on Tuesday. Tokyo’s Consumer Price Index (CPI) is expected to come in at 2.0%, up from the previous 1.8%. Japan will also publish the latest retail sales and industrial production on Tuesday.

Most Japanese stocks were in the red on Monday, with Softbank stock falling by 8%, and Taiyo Yuden, Socionext, and Mitsubishi Motors falling by over 7%. The other top laggards in the index were Mazda, Komatsu, and TDK.

Nikkei 225 Index technical analysis 

Nikkei 225 Index chart | Source: TradingView 

The daily timeframe chart shows that the Nikkei 225 Index has retreated sharply in the past few weeks, moving from a high of ¥59,332 to ¥51,585. It has dropped below the 50-day and 100-day Exponential Moving Averages (EMA), a sign that bears have prevailed.

The index has moved below the Supertrend indicator, confirming the bearish outlook. Also, it has moved below the important support level at ¥52,000.

The most likely scenario is where the Nikkei 225 Index continues falling, with the next key target being the psychological level at ¥50,000. A move above the Strong, Pivot, and Reverse level at ¥53,125 will invalidate the bullish outlook.