[Fundamental viewpoint]
In the U.S. market last week, stock indexes fell for the week on concerns of a global economic slowdown due to interest rate hikes in Europe and the Fed's suggestion of continued rate hikes.
Weekly change NY Dow: -1.67% NASDAQ: -1.44% S&P 500: -1.39%.
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 that the Japanese market is 4.54 points cheaper than the U.S. market, considering the announced OECD nominal GDP forecast for 2024. The reason for the undervaluation is the difference between the S&P 500's PER of 19.8 and the Nikkei 225's expected PER of 15.1 and the current fiscal year, as well as the difference in interest rates and GDP growth between the U.S. and Japan.
This means that if the GDP growth rate difference between Japan and the U.S. in 2021 expands by another 4.54 percentage points compared to the OECD forecast (Japan is revised downward or the U.S. is revised upward), or if the PER of the Nikkei 225 stocks for the current fiscal year is about 47.5 if the Nikkei 225 is about 103,470 yen compared to the current price of the Nikkei 225. The Japanese market is undervalued by about 70,690 yen in the medium to long term.
From a fundamental perspective, the Japanese market can be said to be less attractive than the U.S. market by ¥70,690. Last week, the weakness of 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 above the clouds of the Ichimoku Kinko Hyo. The NASDAQ has a negative weekly trend. The daily price is above the 200-day line and above the Ichimoku cloud. This week, 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 for the Nikkei225 index is +9.0%, the same level as three months ago. The profit growth rate was +1.7%, down -1.0 percentage points from three months ago.
③ Although U.S. long-term interest rates declined, the interest rate differential between the U.S. and Japan widened to 3.38 from 3.36, and the dollar moved toward a weaker yen in the range of ¥141 to ¥143. The dollar index fell -0.56% for the week.
④ The OECD's nominal GDP growth rate for Japan and the U.S. in 2024 is expected to be +2.96% for Japan and +3.40% for the U.S., so the Japanese market is 0.44 percentage points inferior in this aspect.
⑤ The June 2 week was overbought; the June 3 week was likely oversold; this week is expected to be oversold. Of the five points last week, ① was bearish. ①②③⑤ are expected to have an impact.
[Technical viewpoint]
Looking at the Japanese market from a technical perspective, the difference in the 200-day divergence rate from the NASDAQ is 0.1 points (about 30 yen when calculated to the Nikkei 225) over the medium to long term. On the other hand, the difference in the 200-day divergence from the NYDow is 13.8 points (about 4,520 yen when converted to the Nikkei 225) higher in the medium to long term.
The strength of the Japanese market versus the New York Dow narrowed during the week. The VIX, a measure of U.S. market volatility, fell to 13.4 for the week. The Nikkei VI rose to 21.1 for the week. Optimism in the U.S. market suggests that the Japanese market is still overheated.
The Nikkei 225 is below the 9-day but above 25-day lines. This is a "yellow light" for the short-term trend.
The Nikkei 225 is above the Ichimoku Kinko Chart cloud. The Nikkei 225's overall divergence was +29.0%, and its divergence from the 200-day moving average was +16.4%. 3 factors are positive, indicating a "green light" for the medium-term trend.
In the US market, the NYDow is below 9-day line but above 25-day line and 200-day line. It is above the clouds of the Ichimoku Kinko Chart. NASDAQ is below 9-day line but above 25-day line and 200-day line. It is above the clouds of the Ichimoku Kinko Chart.
It is a “yellow light” in the short term and a “green 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 up trend and a short-term no trend. The Japanese market is in a medium-term up trend, and the short-term is no trend.
Analysis of the foreign exchange market shows that the yen has been weakening since January 2023. This week, we expect the yen to be in the range of 143 to 141 yen.
In the U.S. this week, personal income and consumer spending, the PCE price index and bank stress test results will be in focus. Also of interest will be durable goods orders, the firm report on GDP growth, the University of Michigan consumer confidence index, and the tentative home sales index. In addition, several central bank officials will attend the ECB Central Bank Forum in Portugal, including Fed Chairman Jerome Powell and ECB President Jean-Claude Lagarde. Elsewhere, Eurozone inflation, China's manufacturing and non-manufacturing PMIs, and Germany's Ifo business climate index will be in focus.
Last week, the Nikkei 225 remained within the assumed range. The upper price was about 80 yen below the assumed line and the lower price was about 430 yen above the assumed line.
This week, the Nikkei 225 is expected to move between the Bollinger Band +1σ on the upside (currently around 33180 yen) and the Bollinger Band -1σ on the downside (currently around 31120 yen).
This week will be influenced by the PCE price index and the results of the bank stress tests. However, we are still optimistic about the U.S. markets as volatility is decreasing. Japanese markets are likely to adjust due to overheating, but there is unlikely to be a deep push.
