[Fundamental viewpoint]
In the US markets last week, stock indices rose sharply on the week as the June jobs report showed a larger-than-market-expected increase in the number of employees and the near-term tariff risk receded.
Weekly change NY Dow: +2.30%, NASDAQ: +1.62%, S&P 500: +1.72%.
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 3.85 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 23.2and the Nikkei 225's P/E ratio of 15.8 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 3.85 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 40.2 Or, the Nikkei 225 will be around 101,420 yen.
As a result, the Japanese market is undervalued by about 61,610 yen in the medium to long term.
Fundamentally, the Japanese market can be said to be about 61,610 yen less attractive than the US market. 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 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 below the 200-day line and the clouds on the Ichimoku Chart. The weekly leg of the NASDAQ was positive. The daily is above the 200-day line and the clouds of the Ichimoku Chart. This week, the focus will be on whether the NY Dow can keep above the 200-day line..
② As a result of the earnings announcements, the expected ROE of the Nikkei 225 stocks was +9.0%, a deterioration of -0.1 percentage points compared to three months ago. Profit growth was -3.3%, a deterioration of -9.7 percentage points compared to three months ago.
③ Long-term interest rates in the US rose and the interest rate differential between the US and Japan widened from 2.85 to 2.93, causing the dollar to move against the yen in the range of ¥142 to ¥145. The Dollar Index fell -0.28% on 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 fourth week of June was overbought, the first week of July was likely overbought and this week is expected to be overbought. Of the five points, ① and ⑤ were bullish last week.
[Technical viewpoint]
From a technical perspective, the Japanese market is undervalued by 5.0 points in the medium to long term in terms of the difference in the 200-day divergence rate from the NASDAQ (about 1990 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is undervalued by 0.3 point in the medium to long term (about 120 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 US market volatility, rose to 17.5 for the week. The Nikkei VI rose to 26.7 for the week. The US market is optimistic and the Japanese market is ‘skeptical..
The Nikkei 225 is above the 9-day line but 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 +15.3%, while the 200-day moving average divergence was +4.7%. As all three factors are positive, the medium-term trend also 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 143 and 146 yen.
This week, US markets will be most interested in developments in US tariff policy as the 9 July deadline for the end of the tariff moratorium approaches. Also of interest will be the release of the FOMC minutes to find out the Fed's policy direction for the year. Globally, China's consumer and producer prices, the UK's monthly GDP and Germany's industrial production and trade statistics will be released.
Last week, the Nikkei 225 moved mostly within the expected range. The upper price was above 190 yen and the lower price was above 60 yen.
This week, the Nikkei 225 is expected to move between Bollinger Band +2σ (currently around JPY 40460) on the upside and Bollinger Band +1σ (currently around JPY 39570) on the downside.
Whether or not the Nikkei 225 can stay above the Bollinger Band +1σ this week is important for predicting the future.
