[Fundamental viewpoint]
Stock indices were choppy and mixed during the week in the US markets last week, as uncertainty over the military conflict between Israel and Iran weighed on the outlook, while diplomatic efforts were also underway.
Weekly volatility NY Dow: +0.02%, NASDAQ: +0.21%, S&P 500: -0.15%.
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 3.93 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 22.8 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 3.93 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 39.9 Or, the Nikkei 225 will be around 98,590 yen.
As a result, the Japanese market is undervalued by about 60,190 yen in the medium to long term.
Fundamentally, the Japanese market can be said to be about JPY 60,190 less attractive than the US market. Weakness in the Japanese market has reduced somewhat in the 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 negative last week. The daily is below the 200-day line and the clouds on the Ichimoku Chart. The weekly leg of the NASDAQ was negative. 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%, the same level as three months ago. Profit growth was -3.6%, a deterioration of -10.9 percentage points compared to three months ago.
③ Although long-term interest rates in the US fell and the interest rate differential between the two countries narrowed from 3.00 to 2.99, the dollar moved in a weaker direction against the yen in the range of 143-146 yen. The Dollar Index rose +0.65% 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 second week of June was overbought, the third week of June was likely overbought and this week is expected to be overbought. Of the five points, (iii) was bullish last week.
[Technical viewpoint]
From a technical perspective, the Japanese market is undervalued by 2.8 points in the medium to long term in terms of the difference in the 200-day divergence rate from the NASDAQ (about 1,080 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is overvalued by 2.2 point in the medium to long term (about 840 yen when converted to the Nikkei 225).
Japanese markets are weak against the NY Dow and NASDAQ. The VIX, an indicator of US market volatility, declined slightly to 20.6 for the week. The Nikkei VI fell to a weekly low of 25.6. Both the US and Japanese markets are in a state of ‘doubt’.
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 +7.3%, while the 200-day moving average divergence was +1.3%. As all three factors are positive, the medium-term trend also has a "green light".
In the US market, the NY Dow is below the 9-day line and 25-day and 200-day lines. It is above the clouds of the Ichimoku chart.
The NASDAQ is bekow the 9-day line and above 25-day and 200-day lines. It is above the clouds above the Ichimoku Chart.
It is a ‘yellow 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 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 145 and 148 yen.
This week, US markets will continue to focus on developments in the Israeli-Iranian conflict, particularly the possibility of US military involvement, and updates on global trade negotiations. Attention will also focus on Fed Chairman Jerome Powell's congressional testimony. Economic indicators include the PCE report and durable goods orders. Globally, preliminary PMI figures for the US, Eurozone, Japan and other countries will also be released.
Last week, the Nikkei 225 was above the expected range. The upper price was above by JPY 160 and the lower price was above by JPY 650.
This week, the Nikkei 225 is expected to move between the Bollinger Band +2σ (currently around JPY 38840) on the upside and the 25-day line (currently around JPY 37890) on the downside.
This week, it will be interesting to see whether the Nikkei 225 can hold above the support line at 38400 yen.
