Outlook for the Nikkei average this week [30-July 2023]

 [Fundamental viewpoint]

In the U.S. market last week, stock indices rose for the week as stocks with good earnings were bought and the results of the FOMC meeting were generally in line with market expectations.

Weekly change NY Dow: +0.66% NASDAQ: +2.02% S&P 500: +1.01%.

                                       

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 4.80 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 20.9 and the Nikkei 225's P/E ratio of 15.2, 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 4.80 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 55.6, or if the Nikkei Index is around 120,140 yen, the Nikkei Index will be at the same level as the current Nikkei Index price. 87,400 yen,

 

Fundamentally, the Japanese market is 87,400 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 positivee 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 Nikkei225 index came in at +8.9%, an improvement of +0.1% from three months ago. The profit growth rate was +1.8%, an improvement of +0.7 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 3.40 to 3.41, but the dollar moved slightly higher against the yen in the range of ¥141 to ¥138. The dollar index rose +0.61% 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 July 3 week was overbought; the July 4 week was likely overbought and is expected to be overbought this week. Of the five points last week, (1) was bullish. ①②③⑤ are expected to have an impact.

 

[Technical viewpoint]

Looking at the Japanese market from a technical perspective, it is undervalued by 5.8 point (about 1900 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 7.8 points in the medium to long term (about 2560 yen, which is calculated into the Nikkei 225).

 

The strength of the Japanese market versus the NY Dow was extended during the week. The VIX, a measure of U.S. market volatility, declined to a weekly low of 13.3. The Nikkei VI fell to a weekly low of 18.6. The U.S. market is optimistic, suggesting that the Japanese market is somewhat more volatile.

 

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 +18.6%, and its divergence from the 200-day moving average was +13.7%. 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 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 143 yen.

 

In the U.S. this week, the main focus will be on U.S. employment data and earnings reports. Also of interest will be manufacturing orders, the JOLT jobs report, and the ISM manufacturing and services PMIs. Elsewhere in the region, the central banks of the United Kingdom and Australia will decide on their monetary policy policies. In addition, the Eurozone's second quarter GDP growth and inflation will also be in focus. Elsewhere, China will release its manufacturing and services PMIs, while Japan, Germany, and the Eurozone will release their unemployment rates.

Last week, the Nikkei 225 fell below its assumed range. The upside was about ¥310 below the assumed line and the downside was about ¥270 below the assumed line.

This week, the Nikkei 225 is expected to move between the Bollinger Band +2σ (currently around 33580 yen) on the upside and the 25-day line (currently around 32730 yen) on the downside.

 

This week is likely to be influenced by the U.S. jobs report and quarterly earnings results of major companies. Volatility in the Nikkei 225 is somewhat high, but the near-term potential for gains seems high.