[Fundamental viewpoint]
In the US markets last week, the announcement of the US administration's tariff policy led to a sharp weekly decline in stock indices as selling swelled on fears that the economy and corporate earnings could deteriorate as a result of tariff reprisals.
Weekly volatility NY Dow: -7.86%, NASDAQ: -10.02%, S&P 500: -9.08.
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 4.00 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 20.0 and the Nikkei 225's P/E ratio of 13.8 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 4.00 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 30.5 Or, the Nikkei 225 will be around 75,010 yen.
As a result, the Japanese market is undervalued by about 41,230 yen in the medium to long term.
Fundamentally, the Japanese market can be said to be about 41,230 less attractive than the US market. Weakness in the Japanese market was magnified 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 below the clouds on the Ichimoku Chart. The weekly leg of the NASDAQ was posittive. The daily is below the 200-day line and below the clouds of the Ichimoku Chart. 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 forecasted ROE of the Nikkei 225 companies was +9.1%, the same level as three months ago. The profit growth rate was +6.8%, an improvement of +4.6 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 widened from 2.72 to 2.83, the dollar moved in the direction of a stronger yen in the range of ¥150 to ¥144. The Dollar Index rose +0.93% 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 March was oversold, the first week of April was likely 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, the difference in 200-day divergence from the NASDAQ is 3.5 points (about 1,180 yen in terms of the Nikkei 225) expensive in the medium to long term. On the other hand, the 200-day divergence from the NYDow is undervalued by 2.8 points in the medium to long term (about 950 yen in terms of the Nikkei 225)..
Japanese markets have been mixed in terms of strength against the NY Dow and NASDAQ. The VIX, an indicator of US market volatility, rose to 45.3 for the week. The Nikkei VI rose to 35.6 for the week. Both the US and Japanese markets are in a state of ‘extreme fear’.
The Nikkei 225 is below the 9-day and 25-day lines. The short-term trend has a ‘red light’.
The Nikkei 225 is below the equilibrium cloud. The overall divergence is -32.8% and the divergence from the 200-day moving average is -12.2%. As these three factors are negative, a ‘red light’ has been illuminated for the medium-term trend.
In the US market, the NY Dow is below the 9-day line and 25-day and 200-day lines. It is below the clouds of the equilibrium chart.
The NASDAQ is below the 9-day line and below 25-day and 200-day lines. It is below the clouds on the Ichimoku Chart.
This is a ‘red light’ in the short term and a ‘red light’ 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 down trend and a short-term down trend. The Japanese market is in a medium-term down trend, and the short-term is down 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 147 and 143 yen.
In the US markets, the trade war is likely to remain a key focus this week. Also of interest will be the release of the Consumer Price Index (CPI) and the Producer Price Index (PPI) and how tariffs will affect inflation. Globally, retail sales in the eurozone and industrial production in Germany will be released, as well as inflation and trade data from China.
Last week, the Nikkei 225 fell well below its expected range. The upside was below ¥1030 and the downside was below ¥1590.
This week, the Nikkei 225 is expected to move between Bollinger Band -1σ (currently around JPY 35890) on the upside and Bollinger Band -3σ (currently around JPY 33820) on the downside.
This week, investors in the Japanese and US markets will have to work hard to find the ingredients for a rebound.