[Fundamental viewpoint]
In the US markets last week, stock indices fell over the week as higher US long-term interest rates and better-than-expected December jobs data contributed to the long-term interest rate outlook.
Weekly volatility NY Dow: -1.86%, NASDAQ: -2.34%, S&P 500: -1.94%.
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 4.63 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 23.4 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 4.63 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 55.6 Or, the Nikkei 225 will be around 140,200 yen.
As a result, the Japanese market is undervalued by about 101,010 yen in the medium to long term.
Fundamentally, the Japanese market can be said to be about 101,010 less attractive than the US market. Weakness in the Japanese market narrowed 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 chart is above the 200-day line and below 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 return above the 25-day line.
② As a result of the earnings announcements, the expected ROE of the Nikkei 225 stocks was +9.1%, an improvement of 0.3 percentage points compared to three months ago. The profit growth rate was +2.5%, a deterioration of -0.2 percentage points compared to three months ago.
③ Long-term interest rates in the US rose and the interest rate differential between the US and Japan widened from 3.53 to 3.57, causing the dollar to move against the yen in the range of ¥156 to ¥158. The Dollar Index rose +0.66% 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 fifth week of December was oversold, the first week of January was likely oversold, and this week is expected to be oversold. Last week, of the five points, ① was bearish.
[Technical viewpoint]
Looking at the Japanese market from a technical perspective, it is undervalued by 6.0 points in the medium to long term in terms of the difference in the 200-day divergence rate from the NASDAQ (about 2350 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is undervalued by 1.0 points in the medium to long term (about 390 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 a weekly high of 19.5. The Nikkei VI remained high at 21.7 for the week. Both the US and Japanese markets are slightly pessimistic.
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 equilibrium cloud. The overall divergence is +1.5% and the divergence from the 200-day moving average is +1.3%. As these three factors are positive, the medium-term trend has a ‘green light’.
In the U.S. market, the NYDow is below the 9-day, and 25-day lines, and above 200-day line. It is below the Ichimoku Chart cloud.
The NASDAQ is below the 9-day, and 25-day lines, and above 200-day line. The NASDAQ is above the Ichimoku Chart cloud.
This is a “red signal” in the short term and a “yellow signal” in the medium term.
[Outlook for this week]
Looking at the US market from a fundamental perspective, recessionary fears are receding 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 no trend and a short-term down 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 weaker since bottoming out at the 140 yen level, which was reached in September 2024. This week, the yen is expected to fall to the ¥157 to ¥159 range.
This week in the US markets, major banks such as JP Morgan Chase, Wells Fargo, Goldman Sachs and Citigroup will release their quarterly results. Key inflation data such as CPI and PPI will also be in focus to determine price trends and the direction of Fed policy. Globally, China's Q4 GDP growth, trade statistics, industrial production and retail sales will be released, as well as UK inflation and retail sales, and in the eurozone, the minutes of the ECB's monetary policy meeting.
Last week, the Nikkei 225 was above its expected range. The upper price was above ¥560 and the lower price was below ¥150.
This week, the Nikkei 225 is expected to move between the Bollinger Band +2σ (currently around JPY 40150) on the upside and the Bollinger Band -2σ (currently around JPY 38640) on the downside.
The Nikkei 225 is likely to remain soft this week, although there is likely to be interest in the future reading of US interest rates.
