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

 [Fundamental viewpoint]

In the U.S. markets last week, stock indexes rose for the week as both concerns about the health of banks and inflation fears receded.

Weekly change NY Dow: +2.02% NASDAQ: +2.19% S&P 500: +2.35%.

                                       

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 4.51 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 19.8 and the Nikkei 225's expected PER of 15.3 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 4.51 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 49.0 if the Nikkei 225 is about 106,520 yen compared to the current price of the Nikkei 225. The Japanese market is undervalued by about 73,330 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 ¥73,330. 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    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 +2.4%, down -0.8 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 3.38 to 3.45, moving the dollar against the yen in the range of ¥142 to ¥145. The dollar index rose +0.05% 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 June 3 week was oversold; the June 4 week was likely overbought, and this week is expected to be overbought. Of the five points last week, 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 1.0 point (about 330 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 13.0 points in the medium to long term (about 4310 yen, which is calculated into the Nikkei 225).

 

The strength of the Japanese market versus the NY 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 declined to a weekly low of 19.1. Optimism in the U.S. market suggests that the Japanese market is somewhat 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 +30.0%, and its divergence from the 200-day moving average was +17.3%. 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 144 to 146 yen.

 

In the U.S. this week, the employment report and FOMC minutes will be most closely watched. In addition, the ISM Manufacturing and Services PMIs, Factory Orders, and Trade Statistics will be released. Outside of the U.S., manufacturing PMIs from India, Russia, South Korea, and Canada, as well as inflation rates from South Korea, Turkey, and Mexico will also be of interest. In addition, Australia's interest rate policy decision, Canada's employment data, China's services and manufacturing PMIs, and Japan's Bank of Japan's Tankan will also be of interest to investors.

Last week, the Nikkei average moved above its assumed range. The upper price was about 160 yen above the assumed line and the lower price was about 1,020 yen above the assumed line.
This week, the Nikkei 225 is expected to move between the Bollinger Band +2σ (currently around 34260 yen) on the upside and the 25-day line (currently around 32560 yen) on the downside.
The price is expected to move between the Bollinger Band +2σ (currently around 34260 yen) and the 25-day line (currently around 32560 yen).

This week will be influenced by the employment report and the results of the FOMC meeting minutes, among other things.

However, volatility in the U.S. market is decreasing and the market environment is likely to remain optimistic. Japanese markets have an anomaly that they tend to rise at the beginning of the month, and a bull market is expected.