[Fundamental viewpoint]
In the U.S. markets last week, stock indices were mixed, as the Fed's view that it will begin cutting interest rates in September bought economically sensitive stocks, while some high-tech stocks sold off in response to earnings results.
Weekly volatility NY Dow: +0.75%, NASDAQ: -2.08%, S&P 500: -0.83%..
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 3.90 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 22.1
and the Nikkei 225's P/E ratio of 15.9, 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 3.90 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 41.9 or if the Nikkei Index is around 99,240 yen, the
Nikkei Index will be at the same level as the current Nikkei Index price. 66,980yen,
From a fundamental perspective, the Japanese market can be said to be about 61,580 yen less attractive than the U.S. market. Last week, the weakness in the Japanese market diminished.
[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 +2.9%) by OECD
⑤ Foreign investors over-buying
Looking at recent movements
① The weekly leg of the NYDow was positive last week. The daily chart is above the 200-day line and above 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 within the equilibrium cloud. This week, the focus will be on whether or not the NY Dow can hold 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 +1.8%, 10.7 percentage points worse than three months ago.
③ U.S. long-term interest rates declined and the interest rate differential between the U.S. and Japan narrowed from 3.21 to 3.14, moving the yen against the dollar in the range of 157 yen to 151 yen. The dollar index rose -0.04% for the week.
④ The OECD's nominal GDP growth rate for Japan and the U.S. in 2025 is expected to be +2.9% for Japan and +3.9% for the U.S., so the Japanese market is 1.0 percentage points inferior in this aspect.
⑤ The third week of July was oversold, the fourth week of July was likely oversold, and this week is expected to be overbought. Of the five points last week,③ was bearish.
[Technical viewpoint]
Looking at the Japanese market from a technical perspective, it is undervalued by 7.0 points over the medium to long term in terms of the difference in 200-day divergence from the NASDAQ (about 2640 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is 4.4 points (about 1660 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, declined to a weekly low of 16.4. The Nikkei VI rose to 22.2 for the week. We are somewhat optimistic for the U.S. market and pessimistic for the Japanese market.
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 under the Ichimoku Kinko Chart's cloud. The Nikkei 225's divergence ratio is -6.9%. The divergence from the 200-day moving average was +2.7%. Since these two factors are negative, a “yellow light” has been given to the medium-term trend.
In the U.S. market, the NYDow is above the 9-day, 25-day, and 200-day lines. It is also above the Ichimoku Chart cloud.
The NASDAQ is above the 200-day line but below the 9- and 25-day lines. The NASDAQ is within the Ichimoku Chart cloud.
This is a “yellow signal” in the short term and a “yellow signal” 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 up trend.
Analysis of the foreign exchange market shows that the yen is in the 160 yen range for the first time since April 1990. We expect the 153 to 150 range this week.
In the U.S. markets this week, the Fed's decision to raise interest rates and the jobs report will be in focus. Other notable releases include the JOLT job growth rate, CB Consumer Confidence Index, ISM Manufacturing PMI, Manufacturing Orders, S&P Case-Shiller Home Price Index, Pending Home Sales, and earnings announcements by major companies. Globally, the Bank of England and the Bank of Japan will announce monetary policy. Also of interest will be inflation and GDP growth in the Eurozone, and China's manufacturing and services PMIs.
Last week, the Nikkei 225 fell below its assumed range. The upside was about 60 yen below our assumption and the downside was about 130 yen below the assumed line.
This week, the Nikkei 225 is expected to move between the 25-day line (currently around 40050 yen) on the upside and Bollinger Band -2σ (currently around 37740 yen) on the downside.
This week will likely be another week of examining whether U.S. economic indicators and quarterly earnings results from major companies indicate a recession and how they will affect the timing of interest rate cuts, but the Nikkei 225 is expected to rebound from its oversold condition.
