Outlook for the Nikkei average this week [28-Janyuary 2024]

 [Fundamental viewpoint]

In the U.S. markets last week, stock indices rose for the week on expectations of a Fed rate cut and a soft landing for the U.S. economy.

Weekly change NY Dow:+0.65 NASDAQ:+0.94% S&P 500:+1.06%.

                                                                                                 

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 4.77 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 22.0 and the Nikkei 225's P/E ratio of 15.7, 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 4.77 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 62.4, or if the Nikkei Index is around 142,140 yen, the Nikkei Index will be at the same level as the current Nikkei Index price. 106,390 yen,

 

From a fundamental perspective, the Japanese market can be said to be about ¥106,390 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 positive line. The daily chart is above the 200-day line and the clouds of the Ichimoku Kinko Hyo. The NASDAQ has a posittive 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 +8.8%, an improvement of 0.2 percentage points from three months ago. Profit growth was +8.4%, an improvement of +5.9 percentage points from three months ago.

③    The U.S. long-term interest rate rose, but the interest rate differential between the U.S. and Japan narrowed to 3.44 from 3.47, and the dollar-yen exchange rate was flat in the range of 146-148 yen. The dollar index rose +0.23% 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    It was likely overbought in the third week of January and oversold in the fourth week of January, and is expected to be oversold this week. Of the five points last week, ⑤ was bearish. ①②③⑤ are expected to have an impact.

 

[Technical viewpoint]

From a technical perspective, the Japanese market is undervalued by 1.6 point in the medium to long term in terms of the difference in 200-day divergence from the NASDAQ (about 570 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is 1.6 points (about 57 yen in terms of the Nikkei average) overvalued in the medium to long term.

 

The Japanese market turned overvalued relative to the U.S. market. The VIX, a measure of U.S. market volatility, was unchanged at 13.3 for the week. The Nikkei VI declined to a weekly low of 19.6. The U.S. market is optimistic and the Japanese market is pausing.

 

The Nikkei 225 is below the 9-day and above 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 +22.4%The divergence between the Nikkei 225 and the 200-day moving average was +11.2%. 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 turning toward appreciation since November 2023. This week, we expect the yen to be in the 148-146 yen range.

 

This week, the U.S. market will be most focused on the FOMC results, nonfarm payrolls, wage indicators, and the unemployment rate. Attention will also be focused on the JOLTS job openings and the ISM manufacturing and services PMIs. Earnings season enters its third week, with major companies such as Microsoft, Alphabet, AMD, Apple, Amazon, Merck, and ExxonMobil releasing their earnings. Globally, the market will focus on the Bank of England's monetary policy decision and the Eurozone's Q4 GDP growth rate. Additionally, inflation in Australia, the Eurozone, and South Korea will also be in focus. Finally, China's manufacturing PMI and unemployment rates in Japan and the Eurozone will round out the week.

 

Last week, the Nikkei average moved above its assumed range. The upside was about 260 yen above the assumed line and the downside was about 1,060 yen above the assumed line.

This week, the Nikkei 225 is expected to move between the Bollinger Band +2σ (currently near 37120 yen) on the upside and the 25-day line (currently near 34630 yen) on the downside.

 

Volatility in the Nikkei 225 is trending lower, so this week will be a week of waiting for a push.