Outlook for the Nikkei average this week [15-January 2023]

 [Recognition of the current state of fundamentals]

In the US market last week, the growth rate of the consumer price index slowed down in December, and the Fed's interest rate hike is expected to slow down, and the stock index rose for the week.

Weekly change rate NY Dow: +2.00% NASAQ: +4.82% S&P500: +2.67%.

                                       

On the other hand, medium- to long-term risks include concerns about a prolonged conflict in Ukraine, energy costs, concerns about a slowdown in the global economy due to rising interest rates, and concerns about the bursting of the real estate bubble and a slowdown in China. This also raises concerns about the arrival of stagflation. In addition, geopolitical risks in East Asia and the Middle East continue to require attention.

The difference in the yield spread between the Japanese and U.S. markets is that the Japanese market is 4.47 points cheaper than the U.S. market, considering the announced OECD nominal GDP forecast for 2024. The reason for the undervaluation is the difference between the S&P 500's PER of 17.4 and the Nikkei 225's expected PER of 12.1 and the current fiscal year, as well as the difference in interest rates and GDP growth between the U.S. and Japan.

This means that if the GDP growth rate difference between Japan and the U.S. in 2021 expands by another 4.47 percentage points compared to the OECD forecast (Japan is revised downward or the U.S. is revised upward), or if the PER of the Nikkei 225 stocks for the current fiscal year is about 26.4 or if the Nikkei 225 is about 56920 yen compared to the current price of the Nikkei 225. The Japanese market is undervalued by about 30800 yen in the medium to long term.

 

Fundamentally, the Japanese market is 30800 yen less attractive than the US market. Last week, the weakness in the Japanese market increased.

 

[Conditions for Nikkei average rise]

In the future, the following assumptions are necessary for the Nikkei average to rise further.

①    Rising US market

②　Increase in profit forecast for the current fiscal year above the previous year's level

③ Further depreciation of the yen due to the widening interest rate gap between Japan and the U.S.

④ Upward revision of Japan's 2023 GDP estimate (now +3.5%) by OECD

⑤ Foreign investors over-buying

 

Looking at recent movements

①    Last week, the NYDow weekly trend was negative. The daily footstep is above the 200-day line and the clouds of the equilibrium chart. NASDAQ weekly trend was negative. The daily footstep is bellow the 200-day line but above the clouds of the equilibrium chart. This week, we will be watching to see if the NYDow can keep above the 25-day average line.

②    As a result of the announcement of quarterly financial results, the ROE forecast for Nikkei 225 stocks is 9.0%. It is 0.2 point worse than 3 months ago. In addition, the profit growth rate was +6.4%, an improvement of 1.7 percentage points compared to three months ago.

③    Long-term interest rates in the United States declined, the interest rate differential between Japan and the United States narrowed from 3.07 to 3.00, and the dollar/yen exchange rate moved in the direction of yen appreciation within the range of 132 yen to 127 yen. The Dollar Index fell -1.67% for the week.

④    The OECD's nominal GDP growth rate for Japan and the U.S. in 2024 is expected to be +2.51% for Japan and +3.54% for the U.S., so the Japanese market is 1.03 percentage points worse in this aspect.

⑤    The first week of January was net selling. The 2nd week of January was likely a net sell, and a net sell is expected this week. Last week, out of the five points, ③ and ⑤ were bearish. ①②③⑤ are expected to have an impact.

 

[Technical viewpoint]

Looking at the Japanese market from a technical perspective, the 200-day divergence rate difference with NASDAQ is 0.2 points (about 50 yen when calculated against the Nikkei average) undervalued in the medium to long term. On the other hand, the 200-day divergence rate difference with the NYDow is 10.3 points (about 2690 yen considering the Nikkei average) undervalued in the medium to long term.

 

The strength of the Japanese market relative to the US market weakened during the week. The VIX, a measure of US market volatility, fell to 18.4 for the week. Nikkei VI rose to 18.6 for the week. Both indicators suggest that the market is somewhat optimistic.

 

The Nikkei is above the 9th but below 25th lines. A short-term trend has a "yellow light".

The Nikkei is below the clouds in the Ichimoku Kinko Hyo. The overall deviation rate was -10.6%, and the deviation rate from the 200-day moving average line was -4.3%. The medium-term trend has a "red light" because three factors are negative.

 

In the US market, the NYDow is above the 200-day line and the 9-day and 25-day lines. It is above the clouds of the Ichimoku Kinko Hyo. NASDAQ is above the 9-day, 25-day line but below 200-day lines. It is above the clouds of the Ichimoku Kinko Hyo.

It is a “green light” in the short term and a “yellow light” in the medium term.

 

[Outlook for this week]

Looking at the U.S. market from a fundamental perspective, concerns about a global economic slowdown due to the spread of the new coronavirus have receded, but risk factors include inflation and rising interest rates due to the Russia-Ukraine war and economic slowdown due to energy shortages and deteriorating political conditions in the EU, U.S.-China trade friction, financial market turmoil caused by the bursting of the Chinese real estate bubble and credit contraction, and geopolitical risks in the Middle East and East Asia.

 

Recent LIBOR rates have been on the rise, and we continue to be wary of a resurgence of financial instability.

 

Looking at the technical aspects, the U.S. market is in a medium-term no trend and a short-term down trend. The Japanese market is in a medium-term downtrend, and the short-term is also downtrend.

 

Analyzing the foreign exchange market, the yen has been trending lower since early 2021, but has turned stronger since November. This week, the yen is expected to be in the 127-130 yen range.

 

In the US this week, all eyes will be on retail sales, producer prices, housing data and quarterly results. Also, the latest inflation data for the UK, Japan and Canada will be released, and Japan will hold a monetary policy meeting. Investors will also focus on China's Q4 GDP growth, industrial production and retail sales.

 

Last week's Nikkei Stock Average remained mostly within the expected range. The upper price was about 310 yen below the expected line, and the lower price was about 10 yen below the expected line.

The expected range of the Nikkei average this week is that the upper value is the 25th line (currently around 26790 yen) and the lower value is expected to move between the Bollinger band -2σ (currently around 25230 yen).

 

Due to the sharp appreciation of the yen, the Japanese and US markets lack linkage. This week's Nikkei average is likely to be a weak development.