Outlook for the Nikkei average this week [6-May 2024]

 [Fundamental viewpoint]

In the U.S. markets last week, the April jobs report showed that job growth fell short of market expectations and the pace of wage growth slowed; stock indexes rose for the week as fears that the Fed's start of interest rate cuts would be postponed receded.

Weekly change NY Dow: +1.14%, NASDAQ: +1.43%, S&P 500: +0.55%.

                                                                                                 

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 4.22 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 16.8, 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 4.22 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 58.3, or if the Nikkei Index is around 132,320 yen, the Nikkei Index will be at the same level as the current Nikkei Index price. 94,090 yen,

 

From a fundamental perspective, the Japanese market can be said to be about 94,090 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    The weekly leg of the NYDow was positive last week. The daily chart is above the 200-day line and within the clouds of the Ichimoku Chart. The NASDAQ made a positive weekly move. The daily price is above the 200-day line and within the Ichimoku Chart's clouds. 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 +9.2%, an improvement of +0.1 percentage points from three months ago.

③    U.S. long-term interest rates declined and the interest rate differential between the U.S. and Japan narrowed from 3.78 to 3.62, moving the dollar against the yen from the 160-yen level to the 151-yen level. The dollar index fell -0.96% 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 and fifth weeks of April were likely overbought, and overbought is expected this week. Of the five points last week, ① was bullish. ① ② ③ and ⑤ are expected to have an impact.

 

[Technical viewpoint]

From a technical perspective, the Japanese market is overvalued by 0.2 point in the medium to long term in terms of the difference in 200-day divergence from the NASDAQ (about 80 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is 4.0 points (about 1530 yen in terms of the Nikkei average) overvalued in the medium to long term.

 

The Japanese market is strong against the NY Dow and in line with the NASDAQ. The VIX, a measure of U.S. market volatility, declined to a weekly low of 13.5. The Nikkei VI declined to a weekly low of 19.9. The U.S. market is somewhat optimistic and the Japanese market is somewhat optimistic.

 

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

The Nikkei 225 is in the clouds of the Ichimoku Chart. The Nikkei 225's overall divergence was +8.4%. The divergence from the 200-day moving average was +10.1%. Since two factor is positive, a "yellow signal" is lit in 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 in Ichimoku Chart cloud.
The NASDAQ is above the 9-day line and the 25-day line and the 200-day line. It is in the Ichimoku Kinko's cloud.
This is a " yellow 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 no trend and a short-term up trend. The Japanese market is in a medium-term no trend, and the short-term is no 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 154 yen.

 

This week in the U.S. markets, all eyes will be on the Michigan consumer confidence index and speeches by Fed officials, but the U.S. is expected to have a relatively quiet week. The earnings season for major companies is coming to a close with announcements from Walt Disney, BP, Toyota, Uber, Airbnb, and others.. Globally, all eyes will be on the UK central bank interest rate decision and GDP growth, China's trade statistics, inflation and PMI, German industrial production and trade balance

 

Last week, the Nikkei 225 remained within the assumed range. The upper price was about 1,400 yen below the assumed line and the lower price was about 50 yen above the assumed line.

The expected range for the Nikkei 225 this week is between the upper Bollinger Band +1σ (currently near 39760 yen) and the lower Bollinger Band -1σ (currently near 37910 yen).

 

This week will be relatively quiet with few influential economic indicator releases. Geopolitical risks in the Middle East are calming down, and both the U.S. and Japanese markets are likely to be on an upward trend.