Outlook for the Nikkei average this week [3-September 2023]

 [Fundamental viewpoint]

Stock indices rose for the week in the U.S. markets last week as economic indicators showed an easing of overheating in the labor market and caution about a prolonged period of monetary tightening by the Fed receded.

Weekly change NY Dow: +1.43% NASDAQ: +3.25% S&P 500: +2.50%.

                                       

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 4.66 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 15.4, 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 4.66 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 54.4, or if the Nikkei Index is around 115,770 yen, the Nikkei Index will be at the same level as the current Nikkei Index price. 82,990 yen,

 

From a fundamental perspective, the Japanese market can be said to be about 82,990 yen less attractive than the U.S. market. Last week, the weakness in the Japanese market diminished.

 

[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 within the clouds of the Ichimoku Kinko Hyo. The NASDAQ has a positive 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 +2.9%, an improvement of +1.1 percentage points from three months ago.

③    U.S. long-term interest rates declined and the interest rate differential between the U.S. and Japan narrowed from 3.59 to 3.56, moving the dollar against the yen in the range of ¥147 to ¥144. The dollar index rose +0.07% 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 August was oversold; the fifth week of August was likely overbought, and this week is expected to be oversold. Last week, of the five points, 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 2.6 point (about 850 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 8.1 points in the medium to long term (about 2650 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 13.1. The Nikkei VI fell to a weekly low of 16.9. Anxiety sentiment weakened in both the U.S. and Japanese markets.

 

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's cloud, and the Nikkei 225's total divergence is +13.1%. The divergence between the Nikkei 225 and the 200-day moving average was +11.2%. 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 but below 25-day lines and above the 200-day line. It is within the Ichimoku Chart cloud.
The NASDAQ is above the 9-day and 25-day lines, and 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 143 to 146 yen.

 

This week in the U.S. will be relatively light, with the ISM services PMI, manufacturing orders, and trade statistics in focus. Elsewhere, Australia and Canada will announce their interest rate policies. Inflation rates in Turkey, South Korea, and Russia will also be of interest. GDP growth rates will be released in Australia and Japan. In addition, China's services PMI will be released.

 

Last week, the Nikkei 225 moved above its assumed range. The upper price was about 590 yen above the assumed line and the lower price was about 580 yen above the assumed line.

This week, the Nikkei 225 is expected to move between the Bollinger Band +2σ (currently around 33200 yen) on the upside and the 25-day line (currently around 32250 yen) on the downside..

 

This week is expected to be relatively unaffected by U.S. economic indicators. Volatility in the Japanese market is declining and selling pressure is also decreasing, but the market is approaching an upper resistance line, and whether or not it breaks through this line will likely determine the course of the month.