Outlook for the Nikkei average this week [5-March 2023]

[Fundamental viewpoint]

In the US market last week, long-term interest rates fell as fears of a Fed rate hike widening to 0.5% abated, and equity indices were dominated by buying.

Weekly fluctuation rate NY Dow: +1.75% NASAQ: +2.58% S&P500: +1.90%.

                                       

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 4.42 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 18.0 and the Nikkei 225's expected PER of 13.2 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 4.42 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 31.9 if the Nikkei 225 is about 66020 yen compared to the current price of the Nikkei 225. The Japanese market is undervalued by about 39390 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 ¥39390. 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 positive last week. The daily is above the 200-day line and below the equilibrium cloud. The NASDAQ has a positive weekly trend. The daily is above the 200-day line and above 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 +3.7, a deterioration of -2.4 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 3.44 to 3.45, but the dollar moved toward a stronger yen in the range of ¥137 to ¥135. The dollar index fell -0.70% 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 4th week of February was net selling. The first week of March was likely a net sell, and a net buy is expected this week. Last week, out of the five points, ① was bullish. ①②③⑤ are expected to have an impact.

 

[Technical viewpoint]

Looking at the Japanese market from a technical perspective, it is overvalued by 0.3 points (about 80 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 0.8 points in the medium to long term (about 220 yen when calculated for the Nikkei 225).

The weakness of the Japanese market relative to the U.S. market improved during the week. The VIX, a measure of U.S. market volatility, fell to a weekly low of 18.5. The Nikkei VI fell to a weekly low of 16.2. This suggests optimism in both the U.S. and Japanese markets.

 

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 +6.1%, and the deviation rate from the 200-day moving average line was +2.3%. The medium-term trend has a "green light" because 3 factors are positive.

 

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

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 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 135-133 yen range.

 

In the U.S. this week, the focus will likely be on the February jobs report, JOLTs jobs report, trade statistics, and speeches by several Fed officials. Elsewhere in the region, China's inflation and trade data will be released, as will GDP from the UK, Eurozone, and Japan. In addition, the central banks of Australia and Japan will make monetary policy decisions.

 

Last week, the Nikkei 225 moved above its assumed range. The upper price was about 140 yen above the assumed line and the lower price was about 90 yen above the assumed line.

This week, the Nikkei 225 is expected to move between the Bollinger Band +3σ (currently around 27980 yen) on the upside and Bollinger Band +1σ (currently around 27670 yen) on the downside.

This week, the U.S. jobs report for February will be in focus, but U.S. long-term interest rates and the VIX are trending lower, which should be supportive for growth stocks.