[Fundamental viewpoint]
Last week on the US markets, stock indices rose over the week as concerns over US-China trade friction eased for the time being, alongside strong corporate earnings and expectations of an interest rate cut in October.
Weekly change rate: NY Dow: +2.20%, NASDAQ: +2.31%, S&P 500: +1.92%.
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 1.40 points undervalued for the Japanese market when the OECD's nominal GDP forecast for 2026 is taken into account. The reason for the undervaluation is the difference between the S&P 500's P/E ratio of 22.8 and the Nikkei 225's P/E ratio of 19.1 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 2026 relative to the current price of the Nikkei 225 will be 1.40 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 26.1 Or, the Nikkei 225 will be around 67,340 yen.
As a result, the Japanese market is undervalued by about 18,040 yen in the medium to long term.
From a fundamental perspective, the Japanese market could be said to be approximately ¥18,040 less attractive than the US 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 2026 GDP estimate (now +2.5%) by OECD
⑤ Foreign investors over-buying
Looking at recent movements
① The weekly leg of the NYDow was positive last week. The daily is above the 200-day line and above the clouds on the Ichimoku Chart. 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 financial results announcement, the ROE forecast for Nikkei 225 stocks was +8.9%. This is a deterioration of 0.2 percentage points compared to three months ago. Profit growth was -6.5%. This is a deterioration of 2.5 percentage points compared to three months ago.
③ US long-term interest rates declined, and although the interest rate differential between Japan and the US narrowed from 2.39 to 2.35, the dollar-yen exchange rate moved in a yen-weakening direction within the range of the 150-yen to 153-yen levels. The dollar index rose by +0.40% over the week.
④ The OECD's nominal GDP growth rate for Japan and the U.S. in 2026 is expected to be +2.5% for Japan and +4.3% for the U.S., so the Japanese market is 1.8 percentage points inferior in this aspect.
⑤ The third week of October saw net buying, the fourth week likely saw net buying, and net buying is anticipated this week. Last week, points ① and ③ were bullish factors out of the five points. This week, points ①, ②, ③ and ⑤ are expected to have an impact.
[Technical viewpoint]
From a technical perspective, the Japanese market is overvalued by 5.5 percentage points (equivalent to approximately ¥2620 for the Nikkei average) relative to the NASDAQ's 200-day moving average deviation rate on a medium-to-long-term basis. Conversely, it is overvalued by 13.9 percentage points (equivalent to approximately ¥6610 for the Nikkei average) relative to the NY Dow's 200-day moving average deviation rate over the same timeframe.
The Japanese market is performing more strongly than the NY Dow and NASDAQ. The VIX, an indicator of volatility in the US market, fell to 16.4 on a weekly basis. The Nikkei VI also declined to 25.4 on a weekly basis. The US market is in an “optimistic” state, while the Japanese market is in a state of “mood of suspicion”.
The Nikkei average is above both the 9-day and 25-day moving averages. A green light is flashing for the short-term trend.
The Nikkei average is above the cloud in the Ichimoku Kinko Hyo chart. The overall deviation rate stands at +41.8%, while the deviation rate from the 200-day moving average is +23.6%. With all three factors positive, a green light is flashing for the medium-term trend.
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, concerns about an economic downturn remain in the short 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 indicates that the yen has shifted towards depreciation, with the low of 139 yen reached in April 2025 marking the bottom. This week, the yen is expected to trade between the 151 and 154 yen per dollar range.
This week in the US markets, the FOMC meeting - taking place without the usual data due to the government shutdown - will be the main focus. With uncertainty surrounding US economic indicators due to the shutdown, attention is likely to shift to key earnings announcements from companies such as Microsoft, Apple, Alphabet, Meta, Amazon, UnitedHealth, and ExxonMobil. The meeting between President Trump and Chinese President Xi Jinping will also draw significant attention. Globally, policy rate decisions from the ECB and the Bank of Japan, GDP statistics and inflation rates from Eurozone member states, and China's PMI data are scheduled for release.
Last week, the Nikkei average traded within the expected range. The upper limit fell short by 60 yen, while the lower limit exceeded it by 610 yen.
This week, the Nikkei average is expected to move within a range defined by the upper limit at the Bollinger Band +2σ (currently around 50,240 yen) and the lower limit at the 25-day moving average (currently around 46,970 yen).
This week's Nikkei average is expected to see volatile movements, influenced by the Federal Reserve and Bank of Japan's policy rate decisions and the future direction of monetary policy.
