Outlook for the Nikkei average this week [2-June 2024]

 [Fundamental viewpoint]

In the U.S. market last week, stock indices fell due to cautious comments from Fed officials on interest rate cuts and a rise in long-term interest rates due to poor government bond auctions.

 

Weekly volatility NY Dow: -0.98%, NASDAQ: -1.10%, S&P 500: -0.51%.

                                                                                                 

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 4.42 points undervalued in the Japanese market when the revised OECD nominal GDP forecast for 2025 is taken into account. The undervaluation is due to the difference between the S&P 500's P/E ratio of 21.5 and the Nikkei 225's P/E ratio of 16.4, the difference between the U.S. and Japanese interest rates, and the difference in GDP growth rates.
This means that if the difference in GDP growth between Japan and the U.S. in 2022 is 4.42 points larger than the OECD forecast (Japan is revised downward or the U.S. is revised upward), or if the current year's forecast PER of the Nikkei Index stocks is around 60.2 or if the Nikkei Index is around 140,900 yen, the Nikkei Index will be at the same level as the current Nikkei Index price. 102,410 yen,

 

From a fundamental perspective, the Japanese market can be said to be about 102,410 less attractive than the U.S. market. The 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 2023 GDP estimate (now +3.5%) 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 within the clouds of the Ichimoku Chart. The NASDAQ made a negative weekly move. The daily price is above the 200-day line and the Ichimoku Chart's clouds. we will focus on whether or not the NY Dow can return above the 25-day line.

②    As a result of the announcement of the financial results for the fiscal year ended March, the forecasted ROE for the Nikkei 225 index was +9.0%, a deterioration of 0.1 percentage points from three months ago. The profit growth rate was +1.1%, 10.8 percentage points worse than three months ago.

③    (iii) U.S. long-term interest rates rose and the interest rate differential between the U.S. and Japan widened from 3.47 to 3.50, moving the yen against the dollar in the range of ¥156 to ¥157. The dollar index fell -0.12% for the week.

④    The OECD's nominal GDP growth rate for Japan and the U.S. in 2025 is expected to be +3.4% for Japan and +3.9% for the U.S., so the Japanese market is 0.5 percentage points inferior in this aspect.

⑤    The fourth week of May was oversold, the fifth week of May was likely oversold, and this week is expected to be oversold. Of the five points last week, ① was bearish.

 

[Technical viewpoint]

Looking at the Japanese market from a technical perspective, it is undervalued by 2.6 points over the medium to long term in terms of the difference in 200-day divergence from the NASDAQ (about 1000 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is 4.2 points (about 1620 yen when converted to the Nikkei 225) over the medium to long term.

 

The Japanese market is strong against the NY Dow and weak against the NASDAQ. The VIX, a measure of U.S. market volatility, rose to 12.9 for the week. The Nikkei VI declined to a weekly low of 16.8. The U.S. market is optimistic and the Japanese market is slightly optimistic.

 

The Nikkei 225 is below the 9-day and above the 25-day lines. This is a "yellow light" for the short-term trend.

The Nikkei 225 is within the clouds of the Ichimoku Chart. The Nikkei 225's overall divergence was +7.9%. The divergence from the 200-day moving average was +9.1%. Since two factor is positive, a "yellow signal" is lit in the medium-term trend.

 

In the U.S. market, the NYDow is below the 9-day line and the 25-day line and above the 200-day line. It is within the ichimoku Chart cloud.
The NASDAQ is below the 9-day line and above the 25-day line and the 200-day line. It is above the Ichimoku Kinko's cloud.
This is a " yellow light" in the short term and a "yellow light" in the medium term.

 

[Outlook for this week]

Looking at the U.S. market from a fundamental perspective, concerns about a global economic slowdown due to the spread of the new coronavirus have receded, but risk factors include inflation and rising interest rates due to the Russia-Ukraine war and economic slowdown due to energy shortages and deteriorating political conditions in the EU, U.S.-China trade friction, financial market turmoil caused by the bursting of the Chinese real estate bubble and credit contraction, and geopolitical risks in the Middle East and East Asia.

 

Recent LIBOR rates have been on the rise, and we continue to be wary of a resurgence of financial instability.

 

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.

 

Analyzing the foreign exchange market, the yen is at the 150-yen level for the first time since November 2023. This week, the yen is expected to be in the range of 156 to 158yen.

 

This week, the U.S. market will focus on the PCE price index and speeches by several Fed officials. Also in focus will be the revised Q1 GDP growth, the CB Consumer Confidence Index, the Tentative Home Sales Index, and the Case-Shiller Home Price Index. Globally, attention will be focused on inflation in the Eurozone and Australia, unemployment in the Eurozone, and China's manufacturing and services PMIs. Finally, in Japan, the Consumer Confidence Index, Tokyo Consumer Price Index, Retail Sales, Unemployment Rate, and Industrial Production will be released.

 

Last week, the Nikkei 225 fell below its assumed range. The upside was about 190 yen below the assumed line and the downside was about 420 yen below the assumed line.

This week, the Nikkei 225 is expected to move between the Bollinger Band +2σ on the upside (currently around 39230 yen) and the Bollinger Band -2σ on the downside (currently around 37740 yen).

 

This week will likely be another week of examining whether U.S. economic indicators point to a recession and how it will affect the timing of interest rate cuts, but the Nikkei 225 is likely to remain directionless.