Outlook for the Nikkei average this week [17-September 2023]

 [Fundamental viewpoint]

In the U.S. markets last week, the prospect of interest rates being left unchanged at the FOMC meeting led to a buying spree in economically sensitive stocks. On the other hand, the rise in long-term interest rates led to a sell-off in high-tech stocks, and stock indices were mixed for the week.

Weekly Change NY Dow: +0.12% NASDAQ: -0.39% S&P 500: -0.16%.

                                       

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 4.47 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 20.3 and the Nikkei 225's P/E ratio of 16.1, 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 4.47 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 57.4, or if the Nikkei Index is around 119,580 yen, the Nikkei Index will be at the same level as the current Nikkei Index price. 86,050 yen,

 

From a fundamental perspective, the Japanese market can be said to be about 86,050 yen less attractive than the U.S. market. The 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 within the clouds of the Ichimoku Kinko Hyo. The NASDAQ has a negative weekly line. The daily price is above the 200-day line and within 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 0.4 percentage points from three months ago. Profit growth was +2.3%, 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 3.62 to 3.63, moving the dollar against the yen in the range of ¥145 to ¥147. The dollar index rose +0.26% 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 first week of September was oversold; the second week of September was likely overbought, and this week is expected to be oversold. Last week, of the five points, ③ and ⑤ were bullish.  ①②③⑤ are expected to have an impact.

 

[Technical viewpoint]

Looking at the Japanese market from a technical perspective, the difference in 200-day divergence from the NASDAQ is 3.0 points (about 1010 yen in the Nikkei 225) higher in the medium to long term. On the other hand, the difference in the 200-day divergence from the NYDow is 10.6 points (about 3,550 yen in terms of the Nikkei 225) higher in the medium to long term.

 

The strength of the Japanese market versus the NY Dow was extended during the week. The VIX, a measure of U.S. market volatility, remained unchanged at 13.8 for the week. The Nikkei VI declined to a weekly low of 16.0. Optimistic sentiment prevailed in the Japanese market.

 

The Nikkei 225 is above the 9-day and the 25-day lines. This is a "green light" for the short-term trend.

The Nikkei 225 is above the Ichimoku Kinko Chart's cloud, and the Nikkei 225's total divergence is +19.4%. The divergence between the Nikkei 225 and the 200-day moving average was +13.0%. Since the three factors are positive, a "green signal" is lit for the medium-term trend.

 

In the U.S. market, the NYDow is above the 9-day and below 25-day lines and above the 200-day line. It is within the Ichimoku Chart cloud.
The NASDAQ is below the 9-day line and the 25-day line and above the 200-day line. It is within the Ichimoku Kinko's cloud.
This is a "yellow 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 no 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 146 to 148 yen.

 

This week's U.S. markets will be largely determined by the Fed's decision to raise interest rates on Wednesday. In addition, the U.S. will release housing indicators such as the S&P Global PMI, housing starts, building permits, existing home sales, and the housing market index. In addition, central banks in the United Kingdom, Japan, China, and other countries will deliberate on the direction of monetary policy. Investors will also be closely watching inflation in the U.K., Canada, and Japan, as well as preliminary service and manufacturing PMIs in the U.K., Eurozone, Japan, and Australia..

 

Last week, the Nikkei 225 moved above its assumed range. The upper price was about 670 yen above the assumed line and the lower price was about 660 yen above the assumed line.

This week, the Nikkei 225 is expected to move between the Bollinger Band +3σ (currently around 34090 yen) on the upside and Bollinger Band +1σ (currently around 32960 yen) on the downside.

 

This week will be strongly influenced by the outcome of the FOMC meeting. Volatility in the Japanese market is declining and selling pressure is weakening. The Japanese market is no longer linked to the U.S. market, and further gains can be expected in the Japanese market.