Outlook for the Nikkei average this week [3-March 2024]

 [Fundamental viewpoint]

Despite some profit-taking in the U.S. markets last week, stock indices were mixed for the week, as the growth rate of the PCE price index for January was not higher than market expectations, which provided some relief.

Weekly volatility NY Dow: -0.11, NASDAQ: +1.74%, S&P 500: +0.95%.

                                                                                                 

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 4.24 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 21.0 and the Nikkei 225's P/E ratio of 16.9, 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 4.24 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 59.6, or if the Nikkei Index is around 140,240 yen, the Nikkei Index will be at the same level as the current Nikkei Index price. 100,330 yen,

 

From a fundamental perspective, the Japanese market can be said to be about 100,330 yen 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 negative 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 0.2 percentage points from three months ago. Profit growth was +11.3%, an improvement of +2.4 percentage points from three months ago.

③    The U.S. long-term interest rate rose and the interest rate differential between Japan and the U.S. widened from 3.54 to 3.58, but the dollar-yen exchange rate moved in the range of 150 to 149 yen against the yen. The dollar index fell -0.07% 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 third week of February was likely oversold, the fourth week of February was likely overbought, and this week is expected to be overbought. Last week, of the five points, ① and ⑤ were bullish. ①②③⑤ are expected to have an impact.

 

[Technical viewpoint]

From a technical perspective, the Japanese market is overvalued by 5.2 point in the medium to long term in terms of the difference in 200-day divergence from the NASDAQ (about 2080 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is 9.8 points (about 3910 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 rose to 20.7 for the week. The U.S. market is optimistic and the Japanese market is quite optimistic.

 

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 +40.6%The divergence between the Nikkei 225 and the 200-day moving average was +20.2%. 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.

 

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 148 yen.

 

This week in the U.S. markets, investors will be closely watching the U.S. January jobs report and several Fed officials' speeches, including Fed Chairman Jerome Powell's monetary policy report to Congress. Also in focus will be key U.S. indicators, including the ISM Services PMI, JOLTS Job Openings, Manufacturing Orders, and Trade Statistics. Internationally, the focus will be on the European Central Bank's interest rate decision. In addition, trade data from major exporting countries such as Germany, France, and China, as well as China's services PMI will be in focus.

 

Last week, the Nikkei 225 moved within its expected range. The upper price was about 650 yen below the assumed line and the lower price was about 380 yen above the assumed line.

This week, the Nikkei 225 is expected to move between the Bollinger Band +2σ (currently around 40190 yen) on the upside and Bollinger Band +1σ (currently around 38860 yen) on the downside.

 

This week, the Nikkei 225 is likely to be affected by the employment data and the Fed chairman's comments, but it will be interesting to see if the 40,000-yen mark will be followed by a selloff from the near-term achievement.