Outlook for the Nikkei average this week [2-April 2023]

 [Fundamental viewpoint]

In the U.S. market last week, the calming of financial turmoil and weaker-than-expected growth in the PCE price index in February eased concerns that interest rate hikes would be prolonged, and stock indexes rose.

Weekly change rate NY Dow: +3.22% NASAQ: +3.37% S&P500: +3.48%.

                                       

On the other hand, medium- to long-term risks include concerns about the prolonged conflict in Ukraine, energy costs, financial instability and global economic slowdown due to rising interest rates, and the collapse of the real estate bubble and economic 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 4.20 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 18.2 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 4.20 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 29.7 if the Nikkei 225 is about 62900 yen compared to the current price of the Nikkei 225. The Japanese market is undervalued by about 34950 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 ¥34950. Last week, Last week, the weakness in the Japanese market increased slightly.

 

[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 but below the equilibrium cloud. The NASDAQ has a positive weekly trend. The daily is above the 200-day line and the equilibrium cloud. This week, I would like to pay attention to whether the NY Dow can return to the top of the Ichimoku Kinko Hyo cloud.

②    As a result of the announcement of quarterly financial results, the expected ROE value for Nikkei 225 stocks was +8.9%. -0.1 points worse than 3 months ago. In addition, the profit growth rate was +2.8%, which is -4.4 percentage points worse than three months ago.

③    Long-term interest rates in the United States rose, the interest rate differential between Japan and the United States widened from 3.14 to 3.17, and the dollar/yen exchange rate moved in the direction of yen depreciation within the range of 130 yen to 133 yen. The dollar index fell -0.51% on 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 March was net selling. The 5th week of March was likely a net long, and we expect a net long this week. Last week, out of the five points, 1 and 3 were bullish. ①②③⑤ are expected to have an impact.

 

[Technical viewpoint]

Looking at the Japanese market from a technical perspective, it is undervalued by 4.6 points in the medium to long term in terms of the difference in 200-day divergence from the NASDAQ (about 1290 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is 0.05 points (about 10 yen when converted to the Nikkei average) undervalued in the medium to long term.

 

The strength of the Japanese market relative to the U.S. market decreased during the week. The VIX, a measure of U.S. market volatility, rose to 18.7 for the week. The Nikkei VI rose to 16.7 for the week. Japanese and US markets suggest optimism.

 

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 +6.9%, and the deviation rate from the 200-day moving average line was +2.5%. 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 25-day line and 200-day line. It is below the clouds of the Ichimoku Kinko Chart. NASDAQ is above 9-day line and the 25-day line and 200-day line. It is above the clouds of the Ichimoku Kinko Chart.

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 no trend. The Japanese market is in a medium-term no trend, and the short-term is no trend.

 

Analysis of the foreign exchange market shows that the yen has been weakening since January 2023, but has been appreciating since mid-March. This week, we expect the yen to be in the 132-135 yen range.

 

It's going to be a busy week in the US this week with payrolls, JOLTS vacancies, ISM services, manufacturing PMI and trade data taking center stage. Also, inflation rates for South Korea, Switzerland, Mexico, Indonesia and Turkey will be announced, and central banks such as India, Australia and New Zealand will decide the direction of monetary policy.

 

Last week's Nikkei average remained within the expected range. The upper price exceeded the expected line by about 30 yen, and the lower price exceeded the expected line by about 200 yen.

The expected range of the Nikkei average this week is that the upper value is the Bollinger band +2σ (currently around 28,530 yen) and the lower value is expected to move between the 25th line (currently around 27,660 yen).

 

Financial turmoil and interest rate fears have subsided in the US market, and the VIX has fallen. We can expect steady development in both the Japanese and US markets.