Outlook for the Nikkei average this week [8-October 2023]

 [Fundamental viewpoint]

In the U.S. markets last week, stock indices were mixed for the week, with the supply-demand dynamics in the labor market and long-term interest rates moving in a mixed manner.

Weekly volatility NY Dow: -0.30% NASDAQ: +1.60% S&P 500: +0.48%.

                                       

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 5.01 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 19.0 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 5.01 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 56.6, or if the Nikkei Index is around 122,800 yen, the Nikkei Index will be at the same level as the current Nikkei Index price. 91,810 yen,

 

From a fundamental perspective, the Japanese market can be said to be about 91,810 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 below the 200-day line and the clouds of the Ichimoku Kinko Hyo. The NASDAQ has a positive 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 0.5 percentage points from three months ago. Profit growth was +2.3%, an improvement of +0.1 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 3.82 to 4.01, moving the dollar against the yen in the range of ¥147 to ¥150. The dollar index fell -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 September was oversold; the first week of October was likely oversold, and this week is expected to be overbought. ① and ⑤ were bearish.  ①②③⑤ are expected to have an impact.

 

[Technical viewpoint]

From a technical perspective, the Japanese market is undervalued by 2.6 points in the medium to long term in terms of the 200-day divergence from the NASDAQ (about 810 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is 7.5 points (about 1,460 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 narrowed during the week. The VIX, a measure of U.S. market volatility, remained unchanged at 17.5 for the week. The Nikkei VI rose to 20.5 for the week. Pessimistic sentiment in the Japanese market 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 the Ichimoku Kinko Chart's cloud, and the Nikkei 225's total divergence is -5.4%. The divergence between the Nikkei 225 and the 200-day moving average was +3.5%. Since the one factor are positive, a "yellow signal" is lit for the medium-term trend.

 

In the U.S. market, the NYDow is above the 9-day line and below the 25-day line and the 200-day line. It is below the Ichimoku Chart cloud.
The NASDAQ is above the 9-day line and below the 25-day line and above the 200-day line. It is below 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 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 147 to 149 yen.

 

In the U.S. markets this week, attention will be focused on the Consumer Price Index, FOMC meeting minutes, speeches by Fed officials, the Wholesale Price Index, and the Consumer Confidence Index. There will also be earnings announcements from major companies such as Citigroup, JP Morgan Chase, BlackRock, UnitedHealth Group, PepsiCo, and Delta Air Lines. Internationally, China's CPI inflation, trade balance, and PPI inflation will be in focus, as will Germany's industrial production..

 

Last week, the Nikkei 225 fell below its assumed range. The upside was about 220 yen below the assumed line and the downside was about 720 yen below the assumed line.

This week, the Nikkei 225 is expected to move between the 25-day line (currently near 32400 yen) on the upside and Bollinger Band -2σ (currently near 30870 yen) on the downside.

 

This week will be influenced by the U.S. Consumer Price Index and long-term interest rates. Volatility in the Japanese market is on the rise, and although the ground is not good, we can expect a rebound in the Nikkei 225 once U.S. long-term interest rates settle down.