Outlook for the Nikkei average this week [20-August 2023]

 [Fundamental viewpoint]

In the U.S. markets last week, stock indexes fell for the week due to uncertainty surrounding the Chinese economy and the U.S. financial sector, while long-term interest rates continued their upward trend.

Weekly change NY Dow: -2.21% NASDAQ: -2.59% S&P 500: -2.11%.

                                       

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 5.02 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 20.2 and the Nikkei 225's P/E ratio of 14.7, 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 5.02 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 56.4, or if the Nikkei Index is around 120,460 yen, the Nikkei Index will be at the same level as the current Nikkei Index price. 89,010 yen,

 

Fundamentally, the Japanese market is 89,010 yen less attractive than the US market. Weakness in the Japanese market narrowed somewhat 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 line. The daily price is above the 200-day line and in 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 of the Nikkei 225 indexes came in at +8.6%, a deterioration of 0.2 percentage points from three months ago. Profit growth was +2.6%, an improvement of +3.7 percentage points from three months ago.

③    U.S. long-term interest rates rose, widening the interest rate differential between the U.S. and Japan from 3.58 to 3.63, and the U.S. dollar moved toward a weaker yen in the range of ¥144 to ¥146. The dollar index rose +0.56% 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 August was overbought; the third week of August was likely oversold, and this week is expected to be oversold. Of the five points last week, ① was bearish. ①②③⑤ are expected to have an impact.

 

[Technical viewpoint]

Looking at the Japanese market from a technical perspective, it is undervalued by 1.2 point (about 380 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 5.4 points in the medium to long term (about 1700 yen, which is calculated into the Nikkei 225).

 

The strength of the Japanese market versus the NY Dow narrowed slightly during the week. The VIX, a measure of U.S. market volatility, rose to 17.3 for the week. The Nikkei VI rose to 19.5 for the week. Both the U.S. and Japanese markets were slightly more anxious.

 

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 within the Ichimoku Kinko Chart's cloud, and the Nikkei 225's total divergence is +3.19%. The divergence between the Nikkei 225 and the 200-day moving average was +3.19% and +7.7%. Since the two factors are positive, a "yellow signal" is lit for the medium-term trend.

 

In the U.S. market, the NYDow is below the 9-day and 25-day lines but above the 200-day line. It is also above the Ichimoku Chart cloud.
The NASDAQ is also below the 9-day and 25-day lines, but above the 200-day line. The NASDAQ is also below the 9-day and 25-day lines, but above the 200-day line and within the Ichimoku Kinko's cloud.
This is a "red light" in the short term and a "yellow 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 no trend and a short-term down trend. The Japanese market is in a medium-term no 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 144 to 146 yen.

 

This week in the U.S., attention will focus on the Jackson Hole meeting, which will likely explore new views on the Fed's plans for the year. Also of interest will be existing home sales and durable goods orders. Other important economic indicators to be released include PMIs for the Eurozone, the U.K., the U.S., and Japan, as well as the Tokyo Metropolitan Area Consumer Price Index.

 

Last week, the Nikkei 225 fell below its assumed range. The upside was about 240 yen below the assumed line and the downside was about 740 yen below the assumed line.

This week, the Nikkei 225 is expected to move between the Bollinger Band -1σ on the upside (currently around 31990 yen) and the Bollinger Band -3σ on the downside (currently around 31110 yen).

 

This week is likely to be affected by the Jackson Hole meeting in the US. Volatility is on the rise, and with the growing sentiment of uncertainty, the Nikkei 225 is likely to explore the downside.