Outlook for the Nikkei average this week [14-May 2023]

 [Fundamental viewpoint]

While investor sentiment deteriorated in the U.S. markets last week due to a renewed sense of uncertainty about regional banks, the main high-tech stocks were generally strong, and the stock indices were mixed for the week.

Weekly volatility NY Dow: -1.11% NASDAQ: +0.40% S&P 500: -0.29%.

                                       

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 3.60 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 18.8 and the Nikkei 225's expected PER of 14.6 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 3.60 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 30.5 if the Nikkei 225 is about 61680 yen compared to the current price of the Nikkei 225. The Japanese market is undervalued by about 32290 yen in the medium to long term.

 

From a fundamental perspective, it can be said that the Japanese market is less attractive than the U.S. market by ¥32290. Weakness in the Japanese market was somewhat magnified last week.

 

[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's NYDow's weekly chart was a negative line. The daily chart is above the 200-day line and above the clouds of the Ichimoku Kinko Hyo. The NASDAQ has a positive weekly trend. The daily price is above the 200-day line and above the Ichimoku cloud. This week, we will focus on whether or not the NY Dow can return above the 25-day line.

②    As a result of the announcement of quarterly financial results, the forecasted ROE of the Nikkei225 index was +8.6%, a deterioration of -0.5 percentage points from three months ago. Also, the profit growth rate was -6.1%, a deterioration of -9.4 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 3.03 to 3.08, moving the dollar against the yen in the range of ¥133 to ¥135. The dollar index rose +1.40% 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 first week of May was overbought; the second week of May was likely overbought and is expected to be overbought this week. 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, it is undervalued by 0.7 points in the medium to long term in terms of the difference in 200-day divergence from the NASDAQ (about 210 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is 4.8 points (about 1410 yen when converted to the Nikkei average) overvalued in the medium to long term.

 

Weakness in the Japanese market relative to the U.S. market narrowed during the week. The VIX, a measure of U.S. market volatility, declined to 17.0 for the week. The Nikkei VI was unchanged at 15.8 for the week. This suggests optimism in both the U.S. and Japanese markets.

 

The Nikkei 225 is above the 9-day and 25-day lines. This is a "green light" for the short-term trend.

The Nikkei 225 is above the Ichimoku Kinko Chart cloud. The Nikkei 225's overall divergence was +14.7%, and its divergence from the 200-day moving average was +6.4%. 3 factors are positive, indicating a "green light" for the medium-term trend.

 

In the US market, the NYDow is below 9-day line and 25-day line but above 200-day line. It is above the clouds of the Ichimoku Kinko Chart. NASDAQ is above 9-day line and 25-day line and 200-day line. 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 been weakening since January 2023. This week, we expect the yen to be in the range of 134 to 137 yen.

 

In the U.S. this week, following a speech by a Fed official and retail sales, several housing-related indicators will be in focus, including industrial production, housing starts, building permits, and existing home sales. Other first-quarter GDP growth figures will be released, including Japan and Russia. Also of interest will be industrial production and retail sales in China, inflation in Canada and Japan, and unemployment in the United Kingdom and Australia.

Last week, the Nikkei 225 remained within the assumed range. The upper price was about 100 yen below the assumed line and the lower price was about 550 yen above the assumed line.

This week, the Nikkei 225 is expected to move between the Bollinger Band +2σ (currently near 29600 yen) on the upside and the 25-day line (currently near 28530 yen) on the downside.

Despite concerns of financial instability in the U.S. markets, the VIX is low. This week, the Nikkei 225 is likely to move in line with the Bollinger Band +1σ.