[Fundamental viewpoint]
Last week, the US market saw stock indices rise on expectations that tariff negotiations between Japan and the US would reach an agreement and that trade negotiations with other major trading partners would move forward.
Weekly change: NY Dow: +1.26%, NASDAQ: +1.02%, S&P 500: +1.46%.
On the other hand, medium- to long-term
risks include concerns about a prolonged conflict in Ukraine, tariff policies
of the U.S. administration, 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. Furthermore, 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 3.61 points undervalued for the Japanese market when the OECD's nominal GDP forecast for 2025 is taken into account. The reason for the undervaluation is the difference between the S&P 500's P/E ratio of 24.0.8and the Nikkei 225's P/E ratio of 16.5 the difference between the U.S. and Japanese interest rates, and the difference in GDP growth rates.
In order for the U.S. and Japanese markets to be in equilibrium, the following conditions must be met.
The difference in GDP growth between Japan and the U.S. in 2025 relative to the current price of the Nikkei 225 will be 3.61 percentage points larger than the OECD forecast. (Japan is revised downward or the U.S. is revised upward). Or the current year's forecast PER for stocks in the Nikkei Stock Average becomes about 40.5 Or, the Nikkei 225 will be around 101,950 yen.
As a result, the Japanese market is undervalued by about 60,490 yen in the medium to long term.
Fundamentally, the Japanese market can be said to be about 60,490 yen less attractive than the US market. Weakness in the Japanese market improved 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 2025 GDP estimate (now +3.3%) by OECD
⑤ Foreign investors over-buying
Looking at recent movements
① The weekly leg of the NYDow was positive last week. The daily is above the 200-day line and above the clouds on the Ichimoku Chart.2) The weekly leg of the NASDAQ was positive. The daily is above the 200-day line and above the clouds on the Ichimoku Chart. This week, the focus will be on whether the NY Dow can keep above the 25-day line..
② As a result of the earnings announcements, the expected ROE of the Nikkei 225 stocks was +9.0%, a deterioration of -0.2 percentage points compared to three months ago. Profit growth was -4.1%, a deterioration of -11.4 percentage points compared to three months ago.
③ Long-term interest rates in the United States declined, narrowing the interest rate differential between Japan and the United States from 2.89 to 2.79, and the dollar-yen exchange rate moved in the direction of yen appreciation, ranging from the 148 yen level to the 145 yen level. The dollar index fell 0.80% over the week.
④ The OECD's nominal GDP growth rate for Japan and the U.S. in 2025 is expected to be +3.3% for Japan and +4.4% for the U.S., so the Japanese market is 1.1 percentage points inferior in this aspect.
⑤ The third week of July saw net buying, and the fourth week of July is likely to have seen net buying as well, with net buying expected this week. Last week, of the five points, ① was the bullish factor.
[Technical viewpoint]
From a technical perspective, the Japanese market is undervalued by 2.7 points in the medium to long term in terms of the difference in the 200-day divergence rate from the NASDAQ (about 1120 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is overvalued by 3.7 point in the medium to long term (about 1530 yen when converted to the Nikkei 225).
The Japanese market is stronger than the NY Dow but weaker than the NASDAQ. The VIX, an indicator of volatility in the US market, fell to 14.9 for the week. The Nikkei VI fell to 22.2 for the week. The US market is optimistic, while the Japanese market is in a state of ‘suspicion and distrust.’
The Nikkei 225 is above the 9-day line and the 25-day line. The short-term trend is now showing a “green signal.
The Nikkei 225 is above the Ichimoku Kinko's Kumo (equilibrium) cloud. The overall divergence was +22.6%, while the 200-day moving average divergence was +8.5%. As all three factors are positive, the medium-term trend has a "green light".
In the US market, the NY Dow is above the 9-day line and 25-day and 200-day lines. It is above the clouds of the Ichimoku chart.
The NASDAQ is above the 9-day line and 25-day and 200-day lines. It is above the clouds above the Ichimoku Chart.
It is a ‘green light’ in the short term and a ‘green light’ in the medium term.
[Outlook for this week]
Looking at the US market from a fundamental perspective, recessionary fears are amplified in the near-term. Other risk factors include inflation and rising interest rates due to the Russia-Ukraine war, recession due to energy shortages and deteriorating political conditions in the EU bloc, US-China trade friction, financial market turmoil caused by the bursting of China's property bubble and credit crunch, and expanding geopolitical risks in the Middle East.
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.
Analysis of the foreign exchange market shows that the yen has turned stronger since topping out at 156 yen, which was reached in January 2025. This week, the yen is expected to be between 148 and 145 yen.
This week in the US market, investors will be closely watching trade negotiations between the US and its major trading partners as the August 1 deadline for tariff implementation approaches. Additionally, this week will see the most active earnings announcements from companies such as Microsoft, Apple, Amazon, and Meta. Furthermore, important monetary policy decisions by central banks such as the Federal Reserve and the Bank of Japan are also scheduled. On the data front, key releases include the preliminary second-quarter GDP figures, employment statistics, personal consumption expenditures (PCE), and the ISM Manufacturing Purchasing Managers' Index (PMI). Globally, attention will also focus on the GDP and inflation rate of the Eurozone, as well as China's PMI.
Last week, the Nikkei Average exceeded the expected range. The upper limit exceeded 880 yen, and the lower limit exceeded 120 yen.
This week, the Nikkei Average is expected to move between the upper limit of the Bollinger Band +3σ (currently around 42,170 yen) and the lower limit of the Bollinger Band +1σ (currently around 40,590 yen).
This week, the Nikkei Average is expected to move within the Bollinger Band +2σ.