Nikkei pares gains; eyes on results, stress test response

By Elaine Lies and Aiko Hayashi

TOKYO (BestGrowthStock) – Japan’s Nikkei average rose 0.8 percent on Monday, having pared gains after failing to break above resistance, with profit-taking emerging as investors waited for European markets to respond to the results of bank stress tests.

Hopes for robust corporate results for a raft of firms, including Sony Corp (6758.T: ), Toyota Motor Corp (7203.T: ) and major banks, buoyed the overall market and kept support solid, although all later pulled back from their highs, with Sony ending flat.

European bank stress test results showed seven of 91 banks failed the tests, including banks in Greece and Spain, for an overall capital shortfall of 3.5 billion euros ($4.52 billion).

In initial market reaction in New York late on Friday, the cost of insuring the debt of large European banks fell further and the euro rose against the dollar, marking a seven-week high in Tokyo on Monday.

But gains were limited by doubts about the credibility of the tests, and the benchmark Nikkei (.N225: ) eventually failed to break decisively above resistance at its 25-day moving average — a proxy for a one-month moving average that is closely watched in Japan — around 9,550.

Trade was extremely thin, with 1.3 billion shares changing hands on the Tokyo exchange’s first section, the second-lowest this year after January 4.

“A lot of investors are waiting for the European market response to the stress test results, with some criticism of how soft the tests may have been,” said Nagayuki Yamagishi, a strategist at Mitsubishi UFJ Morgan Stanley Securities.

“Profit-taking emerged after the Nikkei failed to break above its 25-day moving average, and there’s no real sense that the current rally is sustainable. We need definite proof that the global economy is improving.”

The benchmark Nikkei (.N225: ) gained 72.70 points to 9,503.66 after earlier rising as much as 1.4 percent, while the broader Topix (.TOPX: ) rose 0.6 percent to 845.88.

Market players attributed this to wariness over Europe’s response as well as investor reluctance to trade actively ahead of Japanese earnings this week and a raft of U.S. indicators, including new home sales later on Monday.

“The results of the stress tests took us past the first round, so to speak, but that doesn’t mean they were credible enough to wipe away uncertainty about the financial situation in Europe,” said Kenichi Hirano, operating officer at Tachibana Securities.

Charts have also grown a bit brighter as the Nikkei pulled away from oversold territory, with its slow stochastic — a measure of how oversold the market is and whether it is in a short-term up or down trend — rising after a bullish cross.

“I think it’s still a bit hard to say this is a full-fledged rally at this point, but the mood may start to change a bit this week,” said Noritsugu Hirakawa, a strategist at Okasan Securities.

The next target after the 24-day moving average is 9,800, near a recent peak hit on July 14.

EARNINGS HOPE

In early trade, the euro hit a seven-week high against the yen on improved risk appetite after upbeat corporate results boosted equity markets, although it later pared its gains.

The weaker yen helped shares of exporters that have a larger exposure to Europe. Canon Inc (7751.T: ) gained 2.5 percent to 3,530 yen and Olympus (7733.T: ) climbed 1.7 percent to 2,286 yen.

Sony ended flat at 2,512 yen after earlier rising more than 1 percent. The Nikkei business daily said on Monday the company will likely return to profitability in the April-June quarter, beating market expectations for an operating loss, on solid sales and cost cuts.

Toyota Motor Corp (7203.T: ) rose 0.2 percent to 3,090 yen after the Nikkei said it is likely to have secured an operating profit of about 100 billion yen ($1.1 billion) in April-June, thanks to solid sales and a sharp recovery from the previous year’s loss.

But market players said concern about the impact of currency moves on earnings continued to worry investors, who fret about a stronger yen since it eats into exporter profits when repatriated.

The biggest decliner on the Nikkei 225 was Suzuki Motor Corp (7269.T: ), which holds a 54.2 percent stake in India’s top car maker Maruti Suzuki (MRTI.BO: ).

Suzuki slid 3.2 percent to 1,764 yen after Maruti Suzuki reported a surprise 20 percent fall in net profit in the quarter to June, prompting a slew of rating downgrades.

Advancing stocks outnumbered declining ones by 3 to 1.

Stock Market Money

(Editing by Michael Watson)

Nikkei pares gains; eyes on results, stress test response