Outlook for the Nikkei average this week [9-July 2023]

 [Fundamental viewpoint]

In the U.S. markets last week, stock indexes fell for the week due to concerns about a Fed rate hike and uncertainty about the global economic outlook.

Weekly change NY Dow: -1.96% NASDAQ: -0.92% S&P 500: -1.16%.

                                       

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 4.91 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 20.1 and the Nikkei 225's P/E ratio of 15.0, 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 4.91 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 56.7, or if the Nikkei Index is around 122, 470 yen, the Nikkei Index will be at the same level as the current Nikkei Index price. 470 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..

 

From a fundamental perspective, the Japanese market can be said to be less attractive than the U.S. market by ¥90,090. 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 negative 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 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 return 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 +2.1%, down -0.9 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 3.45 to 3.65, but the dollar moved toward yen appreciation in the range of ¥144 to ¥142. The dollar index rose -0.64% 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 fourth week of June was overbought; the first week of July was likely oversold, and this week is expected to be oversold. Of the five points last week, ① and ③ were bearish. ①②③⑤ are expected to have an impact.

 

[Technical viewpoint]

Looking at the Japanese market from a technical perspective, it is undervalued by 2.6 point (about 840 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 12.0 points in the medium to long term (about 3890 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 14.8 for the week. The Nikkei VI rose to 20.3 for the week. The U.S. market is still optimistic, while the Japanese market is pessimistic, suggesting that the U.S. market is still optimistic and the Japanese market is pessimistic.

 

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 +19.0%, and its divergence from the 200-day moving average was +13.9%. 3 factors are positive, indicating a "green light" for the medium-term trend.

 

In the US market, the NYDow is below 9-day line and 25-day line but above 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 “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 143 to 140 yen.

 

Of central interest in the U.S. this week will be the Consumer Price Index for June and speeches by several Fed officials. In addition, investors will focus on second quarter earnings, the University of Michigan Consumer Confidence Index, producer prices, and import/export prices. In addition, the Bank of Canada, the Reserve Bank of New Zealand, and the Korean Central Bank will announce monetary policy. In addition, China, India, and Russia will release their inflation rates for June. Other important releases include China's trade data and new yuan-denominated loans, Germany's ZEW business sentiment index, the UK's May GDP growth and labor statistics, and Australia's business and consumer confidence.

Last week, the Nikkei 225 fell below its assumed range. The upside was about 570 yen below the assumed line and the downside was about 620 yen below the assumed line.

This week, the Nikkei 225 is expected to move between the Bollinger Band -1σ on the upside (currently around 32380 yen) and the Bollinger Band -3σ on the downside (currently around 31240 yen).

This week is likely to be influenced by the results of the Consumer Price Index and other factors. However, volatility is on the rise in both the U.S. and Japanese markets, and the market environment is likely to remain soft.