Outlook for the Nikkei average this week [17-July 2023]

 [Fundamental viewpoint]

In the US market last week, the CPI/PPI fell short of market expectations, and the Fed's rate hike fears receded, and the stock index rose for the week.

Weekly fluctuation rate NY Dow: +2.29 NASDAQ: +3.32% S&P500: +2.42%.

                                       

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 4.73 points undervalued in the Japanese market when the revised OECD nominal GDP forecast for 2024 is taken into account. The undervaluation is due to the difference between the S&P 500's P/E ratio of 20.4 and the Nikkei 225's P/E ratio of 14.9, the difference between the U.S. and Japanese interest rates, and the difference in GDP growth rates.
This means that if the difference in GDP growth between Japan and the U.S. in 2022 is 4.73 points larger than the OECD forecast (Japan is revised downward or the U.S. is revised upward), or if the current year's forecast PER of the Nikkei Index stocks is around 50.3, or if the Nikkei Index is around 109,460 yen, the Nikkei Index will be at the same level as the current Nikkei Index price. 77,060 yen, the Japanese and U.S. markets will be in equilibrium, and the Japanese market will be undervalued by about 90,090 yen in the medium to long term.

 

Fundamentally, the Japanese market is 77,060 yen less attractive than the US market. Last week, weakness in 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    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 of the Nikkei 225 indexes came in at +9.0%, an improvement of +0.1 percentage points from three months ago. The profit growth rate was +2.4%, down -1.2 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 from 3.65 to 3.36, moving the dollar against the yen in the range of ¥142 to ¥137. The dollar index fell -10.05% 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    The first week of July was overbought; the second week of July was likely oversold; and this week is expected to be overbought. Last week, of the five points, ① was bullish and ③ was bearish. ①②③⑤ are expected to have an impact.

 

[Technical viewpoint]

Looking at the Japanese market from a technical perspective, it is undervalued by 6.1 point (about 1980 yen when converted 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, in terms of the difference in 200-day divergence from the NYDow, it is overvalued by 9.6 points in the medium to long term (about 3110 yen, which is calculated into the Nikkei 225).

 

The strength of the Japanese market versus the New York Dow narrowed during the week. The VIX, a measure of U.S. market volatility, rose slightly to 13.6 for the week. The Nikkei VI rose to 20.3 for the week. The U.S. market is optimistic, suggesting that the Japanese market is volatile.

 

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

The Nikkei 225 is above the Ichimoku Kinko Chart cloud. The Nikkei 225's overall divergence was +17.4%, and its divergence from the 200-day moving average was +13.5%. 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 below 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 down 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 138 to 135 yen.

 

This week in the U.S., attention will be focused on earnings results from major U.S. companies such as Bank of America, Morgan Stanley, Goldman Sachs, IBM, Netflix, Tesla, and Johnson & Johnson. Also of interest will be housing-related data, including retail sales, industrial production, existing home sales, housing starts, and building permits. Elsewhere in the region, China is set to release its second quarter GDP growth, retail sales, industrial production, and fixed asset investment. Also of interest will be the inflation rates for the U.K. and Japan.

Last week, the Nikkei 225 moved above its assumed range. The upside was about 340 yen above the assumed line and the downside was about 580 yen above the assumed line.

This week, the Nikkei 225 is expected to move between the 25-day line (currently near 32970 yen) on the upside and the Bollinger Band -2σ (currently near 31920 yen) on the downside.

This week is likely to be affected by the quarterly earnings results of major U.S. companies. However, volatility is declining in both the U.S. and Japanese markets, and relatively firm market conditions are expected.