[Fundamental viewpoint]
Stock indices fell on the week in the US market last week as several Fed officials expressed caution about cutting interest rates amid persistent upward pressure on prices.
Weekly volatility NY Dow: -1.24%, NASDAQ: -3.15%, S&P 500: -2.08%.
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 4.70 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 24.6 and the Nikkei 225's P/E ratio of 15.9 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 4.70 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 63.3 Or, the Nikkei 225 will be around 153,480 yen.
As a result, the Japanese market is undervalued by about 114,840 yen in the medium to long term.
From a fundamental perspective, the Japanese market can be said to be about 114,840 yen less attractive than the U.S. market. Weakness in the Japanese market has been magnified.
[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 +3.0%) by OECD
⑤ Foreign investors over-buying
Looking at recent movements
① The weekly leg of the NYDow was negative last week. The daily chart is above the 200-day line and above the clouds of the Ichimoku Chart. The NASDAQ's weekly leg was negative last week. The daily chart is above the 200-day line and above the equilibrium cloud. This week, the focus will be on whether or not the NY Dow is able to keep above the 25-day line.
② As a result of the earnings announcements, the expected ROE of the Nikkei 225 index stood at +9.0%, an improvement of 0.2 percentage points compared to three months ago. The profit growth rate was +1.8%, -1.6 percentage point worse than three months ago.
③ Long-term interest rates in the US rose and the interest rate differential between the US and Japan widened from 3.31 to 3.38, causing the dollar to move against the yen in the range of ¥152 to ¥156. The Dollar Index rose +1.64% on the week.
④ The OECD's nominal GDP growth rate for Japan and the U.S. in 2025 is expected to be +3.0% for Japan and +3.9% for the U.S., so the Japanese market is 0.9 percentage points inferior in this aspect.
⑤ The first week of November was likely to have been overbought, the second week of November oversold and this week is expected to be oversold. Of the five points, ① was bearish last week.
[Technical viewpoint]
Looking at the Japanese market from a technical perspective, it is undervalued by 8.4 points in the medium to long term in terms of the difference in the 200-day divergence rate from the NASDAQ (about 3250 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is undervalued by 8.1 points in the medium to long term (about 3130 yen when calculated for the Nikkei 225).
Japanese markets are weak against the NY Dow and NASDAQ. The VIX, a measure of US market volatility, rose to 16.2 for the week. The Nikkei VI fell to 24.2 for the week. The US market is slightly optimistic and the Japanese market is volatile.
The Nikkei 225 is below the 9-day and 25-day lines. This is a “red light” for the short-term trend.
The Nikkei 225 is above the Ichimoku Kinko Chart cloud. The Nikkei 225's overall divergence was +1.5% and the divergence from the 200-day moving average was +0.3%. As these three factors are negative, a ‘green light’ has been given to the medium-term trend.
In the U.S. market, the NYDow is below the 9-day, and above 25-day lines, and 200-day line. It is above the Ichimoku Chart cloud.
The NASDAQ is below the 9-day, and above 25-day lines, and 200-day line. The NASDAQ is above the Ichimoku Chart cloud.
This is a “yellow signal” in the short term and a “green signal” in the medium term.
[Outlook for this week]
Looking at the U.S. market in terms of fundamentals, we are aware of concerns of a recession in the near term. Other risk factors include inflation and rising interest rates due to the Russia-Ukraine war, economic recession due to energy shortages and deteriorating political conditions in the EU, U.S.-China trade friction, financial market turmoil caused by the bursting of China's real estate 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 no trend. The Japanese market is in a medium-term up trend, and the short-term is down trend.
Analysis of the foreign exchange market shows that the yen has turned toward appreciation after peaking at 162 yen in June 2024. This week, we expect the yen to be between ¥153 and ¥156.
This week, US markets will focus on updates on the housing market, including manufacturing and service sector PMI data, housing starts and existing home sales. On the monetary policy front, attention will be focused on speeches from Fed officials and ECB President Lagarde. Globally, inflation in the UK, Japan and Germany, as well as preliminary PMI data from Japan, India, the Eurozone and the UK will be released.
Last week, the Nikkei 225 fell below its assumed range. The upside was about ¥150 below the assumed range and the downside was about ¥410 below the assumed line.
This week, the Nikkei 225 is expected to move between the 25-day line (currently around 38920 yen) on the upside and Bollinger Band -2σ (currently around 37850 yen) on the downside.
The Nikkei 225 is likely to remain sluggish in the Japanese market this week unless interest rate cuts are seen in the US market and semiconductor stocks revive.
