Outlook for the Nikkei average this week [22-January 2023]

 [Fundamental viewpoint]

Last week, the U.S. market continued to soften due to deteriorating economic indicators and concerns about the outlook for corporate earnings, but the indexes were mixed for the last week as high-tech stocks picked up on the positive results of Netfilix.

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 4.46 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 17.5and the Nikkei 225's expected PER of 12.4and 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 4.46percentage 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 27.6 if the Nikkei 225 is about 59280 yen compared to the current price of the Nikkei 225. The Japanese market is undervalued by about 32730 yen in the medium to long term.

 

Fundamentally, the Japanese market is 32730 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 but in the clouds of the equilibrium chart. NASDAQ weekly trend was positive. 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 0.1 point worse than 3 months ago. In addition, the profit growth rate was +6.6%, an improvement of 2.0 percentage points compared to three months ago.

③    Although U.S. long-term interest rates declined, the interest rate differential between the U.S. and Japan widened from 3.00 to 3.11 and the dollar moved toward a weaker yen in the range of ¥127 to ¥131. The dollar index fell -0.18% 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    January 2nd week was overbought; January 3rd week was likely overbought; this week is expected to be overbought. Of the five points last week, (3) and (5) were bullish. ①②③⑤ are expected to have an impact.

 

[Technical viewpoint]

Looking at the Japanese market from a technical perspective, the difference in the 200-day divergence rate from the NASDAQ is 0.5 points (about 130 yen when calculated to the Nikkei 225) expensive in the medium to long term. On the other hand, the difference in the 200-day divergence from the NYDow is undervalued by 5.8 points over the medium to long term (about 1,540 yen when converted to the Nikkei 225).

The strength of the Japanese market relative to the U.S. market declined during the week. The VIX, a measure of U.S. market volatility, rose to 19.9 for the week. The Nikkei VI fell to a weekly low of 17.4. The Nikkei VI fell to a weekly low of 17.4. This suggests that the U.S. market is neutral and the Japanese 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 but below the 9-day and 25-day lines. It is in 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 “yellow 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.

 

This week in the U.S., the focus will be on Q4 GDP growth, durable goods orders, PCE price index, personal income and spending, and earnings reports. Also of interest will be preliminary PMI readings for January in the U.S., U.K., Japan, and Eurozone countries. In addition, German IFO business sentiment and South Korean GDP growth and Australian inflation will also be released.

 

Last week, the Nikkei average moved above its assumed range. The upper price was about 200 yen above the assumed line and the lower price was about 590 yen above the assumed line.

This week, the Nikkei 225 is expected to move between the Bollinger Band +2σ (currently around 27730 yen) on the upside and the 25-day line (currently around 26500 yen) on the downside.

Due to the volatility in the currency markets, the Japanese and U.S. markets are not linked to each other. The Nikkei 225 is expected to strengthen this week, although the exchange rate and quarterly earnings results are likely to have an impact on the Nikkei 225.