Outlook for the Nikkei average this week [17-December 2023]

 [Fundamental viewpoint]

Stock indices rose for the week in the U.S. market last week as the market consensus was that inflation continued to slow and that the Fed would begin to cut interest rates next year.

Weekly change NY Dow: +2.92% NASDAQ: +2.85% S&P 500: +2.49%.

                                       

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 4.88 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 21.3 and the Nikkei 225's P/E ratio of 14.6, 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 4.88 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 50.4, or if the Nikkei Index is around 113,980 yen, the Nikkei Index will be at the same level as the current Nikkei Index price. 81,010 yen,

 

From a fundamental perspective, the Japanese market can be said to be about JPY81.010 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 0.3 percentage points from three months ago. Profit growth was +8.8%, an improvement of +6.4 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 3.48 to 3.22, while the U.S. dollar moved toward a stronger yen in the range of ¥146 to ¥140. The dollar index fell -1.34% 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 first week of December was likely oversold, the second week of December was likely overbought, and this week is expected to be overbought.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 6.2 point in the medium to long term in terms of the difference in 200-day divergence from the NASDAQ (about 2040 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is 3.9 points (about 1290 yen in terms of the Nikkei average) undervalued in the medium to long term.

 

The Japanese market's overvaluation relative to the New York Dow weakened during the week.The VIX, a measure of U.S. market volatility, declined to a weekly low of 12.3. The Nikkei VI declined to a weekly low of 17.3. Market sentiment is optimistic in both the U.S. and Japanese markets.

 

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

The Nikkei 225 is above chimoku Kinko Chart's cloud, and the Nikkei 225's total divergence is +6.7%The divergence between the Nikkei 225 and the 200-day moving average was +5.5%. 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 no trend.

 

Analysis of the foreign exchange market shows that the yen has been turning toward appreciation since November 2023. This week, we expect the yen to be in the 141-143 yen range.

 

This week, the U.S. market will focus on the November personal income and spending report featuring the PCE price index. In addition, the finalized third quarter GDP growth rate, the CB Consumer Confidence Index, and durable goods orders will be closely watched. In the housing sector, housing starts and existing and new home sales will be closely watched. Internationally, inflation and retail sales in the U.K. will be in focus, while in Japan, the Bank of Japan's interest rate decision, inflation, and external trade statistics will be in focus. In Germany, the Ifo business climate index, consumer confidence index, and producer inflation will be in focus.

 

Last week, the Nikkei 225 moved above its assumed range. The upside was about 110 yen above the assumed line and the downside was about 180 yen above the assumed line.

This week, the Nikkei 225 is expected to move above the 25-day line (currently near 33130 yen) and below the Bollinger Band -2σ (currently near 32370 yen).

 

This week is likely to be influenced by the Japanese political situation and the dollar/yen movement. The Nikkei 225 is likely to remain volatile.