Outlook for the Nikkei average this week [21-April 2024]

 [Fundamental viewpoint]

In the U.S. markets last week, stock indices were on a weekly downtrend as investor sentiment deteriorated due to concerns that the Fed would begin cutting interest rates later than expected by the market and fears of a retaliatory war between Israel and Iran.

Weekly volatility NY Dow: +0.01%, NASDAQ: -5.52%, S&P 500: -3.05%.

                                                                                                 

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 4.65 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 20.7 and the Nikkei 225's P/E ratio of 16.1, 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 4.65 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 64.0, or if the Nikkei Index is around 147,420 yen, the Nikkei Index will be at the same level as the current Nikkei Index price. 110,360 yen,

 

From a fundamental perspective, the Japanese market can be said to be about 110,360 yen less attractive than the U.S. market. Last week, the weakness in 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 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 +3.4 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 3.68 to 3.78, moving the dollar against the yen from the ¥152 level to the ¥154 level. The dollar index rose +0.10% 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 April was likely overbought, the third 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 in the clouds of the Ichimoku Chart. The Nikkei 225's divergence from the 200-day moving average is -1.0% and +7.4%. Since one factor is positive, a "yellow signal" is lit in 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 in 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 153 to 155 yen.

 

In the U.S. markets this week, attention will be focused on first quarter GDP growth and PCE prices, personal income and consumer spending. In addition, durable goods orders, the S&P Global Manufacturing and Services PMIs, the Temporary Contract Home Sales Index and new home sales will be in focus. Earnings season will also peak. Internationally, manufacturing and services PMIs for Japan, the Eurozone, and the U.K. will be released. Interest rate decisions in Japan and China will also be closely watched.

 

Last week, the Nikkei 225 fell below its assumed range. The upside was about 450 yen below the assumed line and the downside was about 980 yen below the assumed line.

This week, the Nikkei 225 is expected to move between the Bollinger Band -1σ on the upside (currently around 38630 yen) and the Bollinger Band -3σ on the downside (currently around 36790 yen).

 

This week, we need to keep a close eye on U.S. companies' quarterly earnings results and PCE price indexes for their impact on the expected timing of interest rate cuts this year. Once geopolitical risks in the Middle East settle down, both Japanese and U.S. markets are technically at oversold levels and are likely to search for a reversal.