Outlook for the Nikkei average this week [18-June 2023]

 [Fundamental viewpoint]

In the U.S. markets last week, stock indexes gained on the week as the consumer price index slowed and the FOMC left policy rates unchanged.

Weekly change NY Dow: +1.25% NASDAQ: +3.25% S&P 500: +2.58%.

                                       

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 4.45 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 20.1 and the Nikkei 225's expected PER of 15.4 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 4.45 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 48.8 if the Nikkei 225 is about 106,820 yen compared to the current price of the Nikkei 225. The Japanese market is undervalued by about 73,120 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 ¥73,120. Weakness in the Japanese market was 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 positive 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 keep above the 25-day line.

②    As a result of the announcement of quarterly financial results, the forecasted ROE for the Nikkei225 index is +9.0%, the same level as three months ago. The profit growth rate was +1.8%, down -1.4 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 3.33 to 3.36, causing the dollar to move against the yen in the range of ¥139 to ¥141. The dollar index fell -1.21% for the week.

④    The OECD's nominal GDP growth rate for Japan and the U.S. in 2024 is expected to be +2.96% for Japan and +3.40% for the U.S., so the Japanese market is 0.44 percentage points inferior in this aspect.

⑤    June 1 week was overbought; June 2 week was likely overbought; this week is expected to be overbought. Of the five points last week, ①, ③ and ⑤ were bullish. ①②③⑤ are expected to have an impact.

 

[Technical viewpoint]

Looking at the Japanese market from a technical perspective, the difference in the 200-day divergence rate from the NASDAQ is 1.8 points (about 610 yen when calculated to the Nikkei 225) over the medium to long term. On the other hand, the difference in the 200-day divergence from the NYDow is 15.8 points (about 5,330 yen when converted to the Nikkei 225) higher in the medium to long term.

 

The strength of the Japanese market versus the NY Dow was extended during the week. The Japanese market also strengthened against the NASDAQ. The VIX, a measure of U.S. market volatility, fell to a weekly low of 13.5. The Nikkei VI fell to 20.7 for the week. The U.S. market is optimistic, suggesting that the Japanese market is still overheated.

 

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 +32.3%, and its divergence from the 200-day moving average was +12.2%. 3 factors are positive, indicating a "green light" for the medium-term trend.

 

In the US market, the NYDow is above 9-day line and 25-day line and 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 “green 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 up 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 140 to 142 yen.

 

In the U.S. this week, attention will be focused on speeches by several Fed officials, including Chairman Powell's congressional testimony. Also to be watched will be preliminary PMI services and manufacturing data, as well as housing-related data such as housing starts, building permits, and existing home sales. There will be monetary policy announcements from the U.K., China, and other countries. In addition, Japan's inflation rate will be announced.

 

Last week, the Nikkei 225 moved above its assumed range. The upper price was about 320 yen above the assumed line and the lower price was about 1430 yen above the assumed line.

This week, the Nikkei 225 is expected to move between the Bollinger Band +2σ (currently around 33730 yen) on the upside and the 25-day line (currently around 31530 yen) on the downside.

 

This week will be influenced by the comments of Fed officials. However, volatility in the U.S. market is declining and we are optimistic. Although the Japanese market remains overheated, the Nikkei 225 is expected to make further gains as well.