Outlook for the Nikkei average this week [12-March 2023]

 [Fundamental viewpoint]

In the U.S. markets last week, stock indices fell sharply as investors were concerned that the failure of Silicon Valley Bank, a subsidiary of SVB Financial Group, could spread to the entire financial system.

Weekly volatility NY Dow: -4.44% NASAQ: -4.71% S&P 500: -4.55%.

                                       

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 4.24 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 18.1 and the Nikkei 225's expected PER of 13.4 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 4.24 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 30.9 if the Nikkei 225 is about 64980 yen compared to the current price of the Nikkei 225. The Japanese market is undervalued by about 36840 yen in the medium to long term.

 

From a fundamental perspective, the Japanese market can be said to be less attractive than the U.S. market by ¥36840. Last week, the weakness of the Japanese market diminished.

 

[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 weekly leg of the NYDow was negative last week. The daily is below the 200-day line and the equilibrium cloud. The NASDAQ has a negative weekly trend. The daily is below the 200-day line and the equilibrium 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 of the Nikkei225 index was 9.0, the same level as three months ago. In addition, the profit growth rate was +3.5, a deterioration of -2.5 percentage points from three months ago.

③    U.S. long-term interest rates declined and the interest rate differential between the U.S. and Japan narrowed to 3.31 from 3.45, moving the dollar against the yen in the range of ¥137 to ¥134. The dollar index rose +0.11% 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 March 1 week was oversold; the March 2 week was likely overbought; this week is expected to be oversold. Of the five points last week, ① was bearish. ①②③⑤ are expected to have an impact.

 

[Technical viewpoint]

Looking at the Japanese market from a technical perspective, it is overvalued by 6.8 points (about 1910 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 6.2 points in the medium to long term (about 1740 yen when calculated for the Nikkei 225).

The strength of the Japanese market relative to the U.S. market increased during the week. The VIX, a measure of U.S. market volatility, rose to 24.8 for the week. The Nikkei VI rose to 17.9 for the week. This suggests that the U.S. market is pessimistic.

 

The Nikkei is above the 9th and 25th lines. A short-term trend has a "green light".

The Nikkei is above the clouds in the Ichimoku Kinko Hyo. The overall deviation rate was +7.5%, and the deviation rate from the 200-day moving average line was +2.9%. The medium-term trend has a "green light" because 3 factors are positive.

 

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

It is a “red light” in the short term and a “red 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 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 135-132 yen range.

 

Inflation reports and retail sales will be the focus of attention in the U.S. this week. Investors will be looking for signs of spillover from the collapse of Silicon Valley Bank into the financial sector. Elsewhere, the ECB will set its monetary policy course, and China will release industrial production and retail sales data. Finally, the unemployment rate will be released in the U.K. and Australia, and CPI and trade statistics will be released in India..

 

Last week, the Nikkei 225 moved above its assumed range. The upper price was about 120 yen above the assumed line and the lower price was about 50 yen above the assumed line.

This week, the Nikkei 225 is expected to move between the Bollinger Band +1σ (currently around 28070 yen) on the upside and the Bollinger Band -1σ (currently around 27350 yen) on the downside.

In the U.S. market, the VIX is rising sharply as a shift of funds from stocks to bonds is taking place. This week, the Japanese market will have to be affected by this as well.