Outlook for the Nikkei average this week [4-February 2024]

 [Fundamental viewpoint]

In the U.S. markets last week, stock indices rose for the week as strong earnings from some high-tech stocks and employment data showed that the U.S. economy was resilient.

Weekly change NY Dow: +1.43% NASDAQ: +1.12% S&P 500: +1.38%.

                                                                                                 

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 4.62 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 22.2 and the Nikkei 225's P/E ratio of 15.9, 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 4.62 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 60.4, or if the Nikkei Index is around 137,140 yen, the Nikkei Index will be at the same level as the current Nikkei Index price. 100,980 yen,

 

From a fundamental perspective, the Japanese market can be said to be about ¥100,980 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 0.3 percentage points from three months ago. Profit growth was +7.8%, an improvement of +5.0 percentage points from three months ago.

③    The U.S. long-term interest rate fell and the interest rate differential between the U.S. and Japan narrowed to 3.36 from 3.44, but the dollar-yen exchange rate remained flat in the range of 145-148 yen. The dollar index rose +0.47% 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 week of January was overbought, the fifth week of January was likely overbought, and this week is expected to be overbought. Last week, of the five points, ① was bullish. ①②③⑤ are expected to have an impact.

 

[Technical viewpoint]

From a technical perspective, the Japanese market is undervalued by 1.4 point in the medium to long term in terms of the difference in 200-day divergence from the NASDAQ (about 510 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 360 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, rose to 13.9 for the week. The Nikkei VI declined to a weekly low of 19.4. The U.S. market is optimistic and the Japanese market is both optimistic and pessimistic.

 

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 +22.7%The divergence between the Nikkei 225 and the 200-day moving average was +11.8%. 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 focused on earnings announcements from major companies such as McDonald's, Caterpillar, Eli Lilly, Amgen, Walt Disney, and Uber. Also of interest will be the views of Fed officials and key economic indicators such as the ISM Services PMI and the trade balance. Internationally, interest rate decisions in Australia and India, consumer and producer prices in China, industrial production in Germany, and retail sales in the Eurozone will be released.

 

Last week, the Nikkei 225 remained within the assumed range. The upper price was about 1,040 yen below the assumed line and the lower price was about 750 yen above the assumed line.

This week, the Nikkei 225 is expected to move between the Bollinger Band +2σ (currently around 37490 yen) on the upside and the 25-day line (currently around 35190 yen) on the downside.

 

This week will be a week for the Nikkei 225 to challenge 37,000 yen.