Outlook for the Nikkei average this week [22-October 2023]

 [Fundamental viewpoint]

In the U.S. markets last week, geopolitical risks in the Middle East and rising long-term interest rates caused stock indexes to fall sharply for the week.

Weekly change NY Dow: -1.61% NASDAQ: -3.16% S&P 500: -2.39%.

                                       

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 5.21 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 19.5 and the Nikkei 225's P/E ratio of 14.9, 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 5.21 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 67.0, or if the Nikkei Index is around 140,210 yen, the Nikkei Index will be at the same level as the current Nikkei Index price. 108,950 yen,

 

From a fundamental perspective, the Japanese market can be said to be about 108,950 yen less attractive than the U.S. 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 negative line. The daily chart is below the 200-day line and the clouds of the Ichimoku Kinko Hyo. The NASDAQ has a negative weekly line. The daily price is above the 200-day line and below 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 3.86 to 4.08, moving the yen against the dollar in the range of ¥148 to ¥149. The dollar index fell -0.48% 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 October was overbought; the third week of October 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]

From a technical perspective, the Japanese market is undervalued by 2.2 points in the medium to long term in terms of the 200-day divergence from the NASDAQ (about 690 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is 5.7 points (about 1780 yen in terms of the Nikkei 225) more expensive 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, rose to 21.7 for the week. The Nikkei VI rose to 23.2 for the week. Anxiety sentiment increased in both the U.S. and Japanese markets.

 

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

The Nikkei 225 is below chimoku Kinko Chart's cloud, and the Nikkei 225's total divergence is -2.3%The divergence between the Nikkei 225 and the 200-day moving average was +3.6%. Since the one factor is positive, a "yellow signal" is lit for the medium-term trend.

 

In the U.S. market, the NYDow is belowthe 9-day line and the 25-day line and the 200-day line. It is below 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 below 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 148 to 150 yen.

 

This week, the U.S. market will focus on important data such as the third quarter GDP growth rate and the PCE price index. This will be followed by the release of key indicators such as durable goods orders and PMI readings by S&P Global. Meanwhile, earnings announcements from major companies such as Alphabet, Microsoft, Meta, and Amazon will be in full swing. Internationally, the ECB's interest rate decision will be key. Preliminary service and manufacturing PMIs will be released in Australia, Japan, the Eurozone, and the UK..

 

Last week, the Nikkei 225 remained mostly within the assumed range. The upper price was about 70 yen above the assumed line and the lower price was about 500 yen above the assumed line.

This week, the Nikkei 225 is expected to move between the 25-day line (currently around 32060 yen) on the upside and Bollinger Band -2σ (currently around 30590 yen) on the downside.

This week will be influenced by developments in the Middle East and U.S. long-term interest rates. Volatility is on the rise in both the U.S. and Japanese markets, and the Nikkei 225 looks to be at high risk of a decline.