Outlook for the Nikkei average this week [23-July 2023]

 [Fundamental viewpoint]

In the U.S. markets last week, stock indices were mixed for the week, with good-performing stocks being bought, while high-tech stocks were sold.

Weekly change NY Dow:+2.08 NASDAQ:-0.57,S&P 500:+0.69%.

                                       

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 4.83 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 20.7 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 4.83 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 53.3, or if the Nikkei Index is around 115,410 yen, the Nikkei Index will be at the same level as the current Nikkei Index price. 81,100 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 83,100 yen less attractive than the US market. 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 negative weekly line. 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%. This is the same level as three months ago. The profit growth rate was +1.9%, down -0.8 percentage points from three months ago.

③    Although U.S. long-term interest rates were unchanged, the interest rate differential between the U.S. and Japan widened to 3.40 from 3.36, and the dollar moved toward a weaker yen in the range of ¥137 to ¥141. The dollar index rose +1.13% 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 second week of July was overbought; the third week of July was likely overbought and is expected to be overbought this week. Of the five points last week, ③ was bullish. ①②③⑤ are expected to have an impact.

 

[Technical viewpoint]

Looking at the Japanese market from a technical perspective, it is undervalued by 5.3 point (about 1710 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 7.1 points in the medium to long term (about 2290 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, was unchanged at 13.6 for the week. The Nikkei VI declined to a weekly low of 19.8. 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 +15.5%, and its divergence from the 200-day moving average was +12.7%. 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 but above 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 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 141 to 144 yen.

 

In the U.S. this week, attention will be focused on the Fed's decision to raise interest rates, advance estimates for Q2 GDP growth, and earnings results from major companies. There are also important releases to watch, including personal income and spending, the PCE price index, durable goods orders, and the S&P Global PMI. Outside of the U.S., interest rate decisions by the ECB and the Bank of Japan, as well as inflation rates in Germany, France, and Australia will be of interest. Other preliminary PMIs will be released for Australia, Japan, France, Germany, the UK, and the Eurozone.

Last week, the Nikkei 225 remained within the assumed range. The upper price was about 60 yen below the assumed line and the lower price was about 240 yen above the assumed line.

This week, the Nikkei 225 is expected to move between the Bollinger Band +1σ (currently around 33400 yen) on the upside and the Bollinger Band -1σ (currently around 32360 yen) on the downside.

This week will be influenced by the monetary policies of the Fed, the ECB, and the Bank of Japan, as well as the quarterly earnings results of major companies. Volatility in the Japanese markets remains high, and volatility in the Nikkei 225 is likely to remain high.