Outlook for the Nikkei average this week [24-March 2024]

[Fundamental viewpoint]

The FOMC's unchanged outlook for the level of future policy rates from the previous meeting provided buying relief, and stock indices rose for the week.

Weekly change NY Dow: +1.97%, NASDAQ: +2.85%, S&P 500: +2.29%.

                                                                                                 

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 4.11 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 21.6 and the Nikkei 225's P/E ratio of 17.3, 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 4.11 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 60.1, or if the Nikkei Index is around 141,870 yen, the Nikkei Index will be at the same level as the current Nikkei Index price. 100,980 yen,

 

From a fundamental perspective, it can be said that the Japanese market is about 100,98 less attractive than the U.S. market. Last week, the weakness of the Japanese market diminished.

 

[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 +9.0%, an improvement of 0.1 percentage points from three months ago. Profit growth was +11.6%, an improvement of +2.67 percentage points from three months ago.

③    The U.S. long-term interest rate fell and the interest rate differential between Japan and the U.S. narrowed to 3.47 from 3.54, but the dollar moved against the yen in the range of ¥148 to ¥151. The dollar index rose +0.95% 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 second week of March was likely oversold, the third week of March was likely overbought, and this week is expected to be oversold. Last week, of the five points, ① and ③ were bullish. This week,. ① ② ③ and ⑤ are expected to have an impact.

 

[Technical viewpoint]

From a technical perspective, the Japanese market is overvalued by 6.5 point in the medium to long term in terms of the difference in 200-day divergence from the NASDAQ (about 2660 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is 10.6 points (about 4330 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, declined to a weekly low of 13.1. The Nikkei VI declined to a weekly low of 18.5. The U.S. market is optimistic and so is the Japanese market.

 

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 +37.8%The divergence between the Nikkei 225 and the 200-day moving average was +20.8%. 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.

 

Analyzing the foreign exchange market, the yen is at the 150-yen level for the first time since November 2023. This week, the yen is expected to be in the range of 150 to 152 yen.

 

The focus in the U.S. market this week will be on the PCE price index. In addition, speeches by Fed officials, including Chairman Powell, will be the focus of investor attention. Other key data will include durable goods orders, the Q4 GDP confirmation, the CB Consumer Confidence Index, and housing market indicators such as new home sales and pending home sales. Internationally, the focus will be on inflation in France and Italy. In Germany, the consumer confidence index, retail sales, and unemployment rate are of interest. In Japan, the Bank of Japan's Tankan, unemployment rate, industrial production, retail sales, and housing starts will be released.

 

Last week, the Nikkei 225 moved above its assumed range. The upside was about 1,040 yen above the assumed line and the downside was about 790 yen above the assumed line.

This week, the Nikkei 225 is expected to move between the Bollinger Band +2σ (currently around 40800 yen) on the upside and the 25-day line (currently around 39300 yen) on the downside.

 

This week, we will need to keep a close eye on the impact of U.S. economic indicators to be released on long-term interest rates. Although there is a sense of caution about higher prices, if the FOMC meeting passes without incident and reassurance continues, there may still be room for both the U.S. and Japanese markets to move higher.