Outlook for the Nikkei average this week [19-February 2023]

 [Fundamental viewpoint]

In the U.S. markets last week, stock indices were mixed for the week, as CPI and PPI showed strong inflationary pressures, which offset the highs in tech stocks earlier in the week.

Weekly volatility NY Dow: -0.13% NASAQ: +0.59% S&P 500: -0.28%.

                                       

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 4.53 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 18.6and the Nikkei 225's expected PER of 13.1 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 4.53 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 32.2 if the Nikkei 225 is about 67680 yen compared to the current price of the Nikkei 225. The Japanese market is undervalued by about 40160 yen in the medium to long term.

 

Fundamentally, the Japanese market is 40160 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    The NYDow was in crosshairs for the week last week. The daily is above the 200-day line and above the Ichimoku Kinko's Kumo's. The NASDAQ made a crosshair for the week. The daily price is above the 200-day line and above the Ichimoku cloud. We will be watching to see if the NYDow can return above the 25-day average line.

②    As a result of the announcement of quarterly financial results, the forecasted ROE for the Nikkei225 index stood at 9.0, 0.1 percentage point worse than three months ago. The profit growth rate was +4.1, a deterioration of -3.8 percentage points from three months ago.

③    U.S. long-term interest rates rose and the interest rate differential between the U.S. and Japan widened from 3.24 to 3.31, causing the dollar/yen to move toward a weaker yen in the range of ¥131 to ¥135. The dollar index rose +0.29% 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 February 2 week was overbought; the February 3 week was likely oversold; and this week is expected to be oversold. Last week, of the five points, ③ was bullish and ① was bearish. ①②③⑤ are expected to have an impact.

 

[Technical viewpoint]

Looking at the Japanese market from a technical perspective, it is undervalued by 2.5 points (about 690 yen when calculated to the Nikkei 225) in the medium to long term in terms of the difference in the 200-day divergence rate from the NASDAQ.
On the other hand, the difference in the 200-day divergence from the NYDow is undervalued by 3.7 points in the medium to long term (about 1,020 yen when calculated for the Nikkei 225).

Weakness in the Japanese market relative to the U.S. market strengthened during the week.

The VIX, a measure of U.S. market volatility, fell to a weekly low of 20.0. The Nikkei VI fell to a weekly low of 15.4.This suggests that the U.S. market is somewhat pessimistic, but the Japanese market is optimistic.

 

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

The Nikkei is above the clouds in the Ichimoku Kinko Hyo. The overall deviation rate was +2.7%, and the deviation rate from the 200-day moving average line was +0.9%. The medium-term trend has a "green light" because 3 factors are positive.

 

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

It is a “yellow light” in the short term and a “green 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 up trend and a short-term no trend. The Japanese market is in a medium-term up trend, and the short-term is up trend.

 

Analysis of the foreign exchange market shows that the yen has turned toward appreciation since November 2021, but has been weakening since mid-January.

This week, we expect the yen to be in the 134-137 yen range.

 

In the U.S. this week, the focus will be on the FOMC minutes and speeches by Fed officials. Also in focus will be revisions to personal income, personal consumption, the PCE price index, and the fourth quarter GDP growth rate. Attention will also be focused on the latest manufacturing and services PMI readings from major economies including the U.S., U.K., France, Germany, and Japan.

 

Last week, the Nikkei 225 remained within the assumed range. The upper price was about 500 yen below the assumed line and the lower price was about 220 yen above the assumed line.

This week, the Nikkei 225 is expected to move between the Bollinger Band +1σ (currently around 27740 yen) on the upside and the Bollinger Band -1σ (currently around 26740 yen) on the downside.

This week, the FOMC minutes and PCE price indexes will be in focus, but US long-term interest rates and the VIX are trending higher and growth stocks are likely to remain under selling pressure