Outlook for the Nikkei average this week [14-April 2024]

 [Fundamental viewpoint]

In the U.S. markets last week, stock indexes fell for the week as investor sentiment deteriorated on fears that the Fed would begin cutting interest rates later than the market had expected and on speculation of imminent Iranian retaliation against Israel.

Weekly volatility NY Dow: -2.37%, NASDAQ: -0.45%, S&P 500: -1.56%.

                                                                                                 

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 4.34 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 17.0, 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 4.34 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 65.5, or if the Nikkei Index is around 151,960 yen, the Nikkei Index will be at the same level as the current Nikkei Index price. 112,440 yen,

 

From a fundamental perspective, the Japanese market can be said to be about 112,440 less attractive than the U.S. market. The 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 negative line. The daily chart is above the 200-day line and below the clouds of the Ichimoku Kinko Hyo. The NASDAQ has a negative 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 return 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 +9.1%, an improvement of 0.3 percentage points from three months ago. Profit growth was +11.9%, an improvement of +3.5 percentage points from three months ago.

③    The U.S. long-term interest rate rose and the interest rate differential between the U.S. and Japan widened from 3.65 to 3.68, moving the U.S. dollar against the yen from the 151 yen level to the 153 yen level. The dollar index rose +1.66% 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 April was likely overbought, the second week of April was likely oversold, and this week is expected to be oversold. Last week, of the five points, ① was bearish. ① ② ③ and ⑤ are expected to have an impact.

 

[Technical viewpoint]

From a technical perspective, the Japanese market is overvalued by 3.9 point in the medium to long term in terms of the difference in 200-day divergence from the NASDAQ (about 1540 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is 10.0 points (about 3950 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 17.3 for the week. The Nikkei VI declined to a weekly low of 19.97. The U.S. market is somewhat pessimistic and the Japanese market is somewhat pessimistic.

 

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

The Nikkei 225 is above chimoku Kinko Chart's cloud, and the Nikkei 225's total divergence is +19.7%. The divergence between the Nikkei 225 and the 200-day moving average was +14.9%. Since the three factor is positive, a "green signal" is lit for the medium-term trend.

 

In the U.S. market, the NYDow is below the 9-day line and the 25-day line and above the 200-day line. It is below Ichimoku Chart cloud.
The NASDAQ is below the 9-day line and the 25-day line and above the 200-day line. It is above the Ichimoku Kinko's cloud.
This is a " red light" in the short term and a "yellow 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 down trend and a short-term no trend. The Japanese market is in a medium-term up trend, and the short-term is down 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 152 to 154 yen.

 

This week in the U.S. markets, major companies such as Goldman Sachs, Blackstone, Netflix, and P&G will release their earnings results as the first quarter earnings season kicks off. Also in focus will be retail sales and speeches by Fed officials, followed by housing starts and existing home sales. Internationally, China's GDP growth, industrial production, retail sales, home prices, and fixed asset investment will be released, as well as the UK's inflation, unemployment, and retail sales numbers, and Japan's inflation rate.

 

Last week, the Nikkei 225 fell below its assumed range. The upside was about 760 yen below the assumed line and the downside was about 230 yen below the assumed line.

This week, the Nikkei 225 is expected to move between the 25-day line (currently around 39700 yen) on the upside and Bollinger Band -2σ (currently around 38390 yen) on the downside.

 

This week, we will need to closely monitor the impact of U.S. companies' quarterly earnings results on investors' expectations for the timing of interest rate cuts before the end of the year. With geopolitical risks in the Middle East on the rise, if U.S. long-term interest rates continue to rise, both Japanese and U.S. markets are likely to continue to see heavy upside.