[Fundamental viewpoint]
In the US markets last week, stock indices gained on the week as the postponement of the timing of the imposition of additional tariffs on the European Union reduced excessive concerns over trade frictions.
Weekly change NY Dow: +1.60%, NASDAQ: +2.01%, S&P 500: +1.88%.
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 3.74 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 22.4 and the Nikkei 225's P/E ratio of 15.6 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 3.74 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 37.7 Or, the Nikkei 225 will be around 91,610 yen.
As a result, the Japanese market is undervalued by about 53,640 yen in the medium to long term.
Fundamentally, the Japanese market can be said to be about 53,640 less attractive than the US market. Weakness in the Japanese market improved somewhat 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 return above the 200-day line..
② As a result of the earnings announcements, the expected ROE of the Nikkei 225 stocks was +9.1%, a deterioration of -0.1 percentage points compared to three months ago. Profit growth came in at -4.1%, a deterioration of -10.6 percentage points compared to three months ago.
③ Although long-term interest rates in the US declined and the interest rate differential between the two countries narrowed from 2.99 to 2.92, the dollar moved in a weaker direction against the yen in the range of ¥142 to ¥146. The Dollar Index rose +0.34% 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 May was overbought, the fifth week of May was likely overbought and this week is expected to be overbought. Of the five points, ① and ③ were bullish last week.
[Technical viewpoint]
Looking at the Japanese market from a technical perspective, it is undervalued by 3.1 point in the medium to long term in terms of the difference in 200-day divergence from the NASDAQ (about 1150 yen in terms of the Nikkei 225). On the other hand, the difference in 200-day divergence from the NYDow is overvalued by 0.3 points in the medium to long term (about 50 yen in terms of the Nikkei 225).
The Japanese market is strong against the NY Dow and weak against the NASDAQ. The VIX, a measure of US market volatility, fell to a weekly low of 18.6. The Nikkei VI fell to 23.6 for the week. The US market is slightly optimistic and the Japanese market is ‘skeptical’.
The Nikkei 225 is above the 9-day and 25-day lines. The short-term trend has a "green light".
The Nikkei 225 is above the Ichimoku Chart cloud. The overall divergence is +6.0% and the 200-day moving average divergence is +0.5%. 3 factors are positive, so the medium-term trend is also showing a ‘green light’.
In the US market, the NY Dow is above the 9-day line and 25-day and below 200-day lines. It is above the clouds of the equilibrium 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 ‘yellow 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 no trend and a short-term no trend. The Japanese market is in a medium-term no trend, and the short-term is no 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.
US markets are expected to be volatile this week after President Trump accused China of violating a preliminary trade agreement with the US. Economic indicators of note include the ISM manufacturing and services PMIs, speeches by Fed officials, JOLTS jobs, manufacturing orders, trade balance and employment figures. Globally, the ECB's interest rate policy, Eurozone inflation indicators and Chinese PMIs will be released.
Last week, the Nikkei 225 remained within the expected range. The upper price was below ¥640 and the lower price was above ¥640.
This week, the Nikkei 225 is expected to move between the Bollinger Band +2σ (currently around JPY 38970) on the upside and the 25-day line (currently around JPY 37090) on the downside.
This week, the Nikkei 225 will be interested in whether it exceeds the 13 May high (JPY 38494) or falls below the 22 May low (JPY 36856).