Outlook for the Nikkei average this week [29-October 2023]

 [Fundamental viewpoint]

In the U.S. market last week, stock indices fell sharply for the week due to heightened geopolitical risks in the Middle East.

Weekly change NY Dow: -2.14% NASDAQ: -2.62% S&P 500: -2.53%.

                                       

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 4.81 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 18.6 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 4.81 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 53.5, or if the Nikkei Index is around 110,750 yen, the Nikkei Index will be at the same level as the current Nikkei Index price. 79,760 yen,

 

From a fundamental perspective, the Japanese market can be said to be about 79,760 yen less attractive than the U.S. market. Weakness in the Japanese market narrowed 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 +8.5%, a deterioration of 0.4 percentage points from three months ago. Profit growth was +2.1%, an improvement of +0.4 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 4.08 to 3.96, moving the dollar against the yen in the range of ¥150 to ¥149. The dollar index rose +0.39% 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 third week of October was oversold; the fourth week of October was likely oversold and is expected to be oversold this week. 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 3.8 points in the medium to long term in terms of the 200-day divergence from the NASDAQ (about 1180 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is 6.3 points (about 1950 yen in terms of the Nikkei 225) more expensive in the medium to long term.

 

The strength of the Japanese market versus the New York Dow was extended during the week. The VIX, a measure of U.S. market volatility, declined to a weekly low of 21.3. The Nikkei VI fell to a weekly low of 22.6. Anxiety in both the U.S. and Japanese markets increased.

 

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 -3.6%The divergence between the Nikkei 225 and the 200-day moving average was +2.2%. 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 the 200-day line. It is below the Ichimoku Kinko's cloud.
This is a "red light" in the short term and a "red 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 down 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.

 

In the US market this week, attention will be focused on employment statistics, following the Fed's interest rate decision, ISM manufacturing and service industry PMI, JOLTs job opening ratio, and manufacturing industry orders. In addition, major companies such as Apple will report their third quarter financial results. Internationally, the interest rate decisions of the central banks of the UK and Japan are most important. The Eurozone's inflation rate and third quarter GDP growth rate will be the focus of attention. Elsewhere, China's manufacturing PMI will provide insight into the direction of the global economy..

 

Last week, the Nikkei 225 remained within the assumed range. The upper price was about 330 yen below the assumed line and the lower price was about 30 yen above the assumed line.

This week, the Nikkei 225 is expected to move between the 25-day line (currently around 31640 yen) on the upside and Bollinger Band -2σ (currently around 30430 yen) on the downside.

This week will be influenced by the situation in the Middle East, the movement of U.S. long-term interest rates, and the content of quarterly earnings results. Volatility remains high in both the U.S. and Japanese markets, and the Nikkei 225 is expected to be volatile.