Outlook for the Nikkei average this week [03-December 2023]

[Fundamental viewpoint]

In the U.S. markets last week, stock indices rose for the week as the market continued to be supported by the view that the Fed's interest rate hike phase is over.

Weekly change NY Dow: +2.42% NASDAQ: +0.38% S&P 500: +0.77%.

                                       

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 4.87 points undervalued in the Japanese market when the revised OECD nominal GDP forecast for 2025 is taken into account. The undervaluation is due to the difference between the S&P 500's P/E ratio of 20.5 and the Nikkei 225's P/E ratio of 14.8, 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 5.08 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 61.7, or if the Nikkei Index is around 120,250 yen, the Nikkei Index will be at the same level as the current Nikkei Index price. 86,820 yen,

 

From a fundamental perspective, the Japanese market can be said to be about JPY86,820 less attractive than the U.S. market. Weakness in the Japanese market diminished 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 positive line. The daily chart is above 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 the Ichimoku cloud. This week, we will focus on whether or not the NY Dow can keep 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 +8.9%, an improvement of 0.2 percentage points from three months ago. Profit growth was +8.7%, an improvement of +5.7 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 to 3.51 from 3.71, while the dollar moved toward a stronger yen in the range of 149-146 yen. The dollar index fell -0.21% for the week.

④    The OECD's nominal GDP growth rate for Japan and the U.S. in 2025 is expected to be +3.4% for Japan and +3.9% for the U.S., so the Japanese market is 0.5 percentage points inferior in this aspect.

⑤    The fourth and fifth weeks of November were likely overbought, and overbought is expected this week. Last week, of the five points, ① was bullish and ③ was bearish. ①②③⑤ are expected to have an impact.

 

[Technical viewpoint]

From a technical perspective, the Japanese market is undervalued by 1.2 point in the medium to long term in terms of the difference in 200-day divergence from the NASDAQ (about 400 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is 1.0 points (about 330 yen in terms of the Nikkei average) overvalued 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, declined to a weekly low of 12.6. The Nikkei VI fell to a weekly low of 16.2. Optimistic sentiment continued in both the U.S. and Japanese markets.

 

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 chimoku Kinko Chart's cloud, and the Nikkei 225's total divergence is +13.9%The divergence between the Nikkei 225 and the 200-day moving average was +7.9%. Since the three factor is positive, a "green signal" is lit for the medium-term trend.

 

In the U.S. market, the NYDow is above the 9-day line and the 25-day line and the 200-day line. It is above Ichimoku Chart cloud.
The NASDAQ is above the 9-day line and the 25-day line and the 200-day line. It is above the Ichimoku Kinko's cloud.
This is a "green light" in the short term and a "green 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 up trend and a short-term up 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 148 to 145 yen.

 

This week, the U.S. market will focus on the jobs report, the JOLTS job openings report, and the ISM Non-Manufacturing PMI. In addition, the University of Michigan Consumer Confidence Index and Manufacturing Orders will provide insight into economic conditions. Internationally, Australia's monetary policy and China's inflation rate will be in focus. In addition, China's services PMI and Germany's industrial production and manufacturing orders will help provide a comprehensive view of economic activity.

 

Last week, the Nikkei 225 fell below its assumed range. The upside was about 530 yen below the assumed line and the downside was about 380 yen below the assumed line.

This week, the Nikkei 225 is expected to move between the Bollinger Band +1σ (currently around 33610 yen) on the upside and the Bollinger Band -1σ (currently around 31660 yen) on the downside.

 

This week will be influenced by the JOLTS job openings and employment data. Volatility is low in both the U.S. and Japanese markets, but profit-taking is likely, and the Nikkei 225 is expected to struggle in a narrow range.