Outlook for the Nikkei average this week [15-July 2024]

 [Fundamental viewpoint]

In the U.S. market last week, the Consumer Price Index (CPI) for June came in below market expectations, raising expectations of a September interest rate cut by the Fed. As a result, long-term interest rates fell and stock indices rose.

 

Weekly change NY Dow: +1.59%, NASDAQ: +0.25%, S&P 500: +0.87%..

                                                                                                 

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 3.56 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 22.7 and the Nikkei 225's P/E ratio of 17.2, 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 3.56 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 44.0 or if the Nikkei Index is around 105,740 yen, the Nikkei Index will be at the same level as the current Nikkei Index price. 64,550yen,

From a fundamental perspective, the Japanese market can be said to be about 64,550 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 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 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 positive 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 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 +8.9%, a deterioration of 0.1 percentage points from three months ago. The profit growth rate was +0.8%, 11.2 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 3.22 to 3.18, moving the U.S. dollar slightly higher against the yen in the range of 161 to 157 yen. The dollar index fell -0.75% 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 first week of July was likely overbought, the second week of July was likely overbought, and this week is expected to be oversold. Last week, of the five points, ① was bullish and ③ was bearish.

 

[Technical viewpoint]

Looking at the Japanese market from a technical perspective, it is undervalued by 4.6 points over the medium to long term in terms of the difference in 200-day divergence from the NASDAQ (about 1890 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is 6.8 points (about 2800 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, was flat at 12.5 for the week. The Nikkei VI rose to 18.4 for the week. The U.S. market is optimistic and the Japanese market is somewhat optimistic.

 

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

The Nikkei 225 is above the Ichimoku Kinko Chart cloud. The Nikkei 225's total divergence was +22.3%. The divergence from the 200-day moving average was +13.3%. Since all three factors are positive, the "green light" is on for the medium-term trend.

 

In the U.S. market, the NYDow is above the 9-day line and the 25-day line and the 200-day line. It is above the ichimoku Chart cloud.
The NASDAQ is above the 9-day line and the 25-day line and the 200-day line. It is above the Ichimoku Kinko's cloud.
This is a " green light" in the short term and a " green 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 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 155 to 158 range this week.

 

This week, GS, BlackRock, BoA, Morgan Stanley, J&J, and Netflix will announce earnings results in the US market. In addition, several Fed officials, including Chairman Powell, are scheduled to speak. In addition, economic indicators such as retail sales, industrial production, and housing starts will be released. Globally, China's GDP growth, industrial production, retail sales, and unemployment rates; Japan's inflation rate; the U.K.'s unemployment rate and retail sales; and Germany's business sentiment index will be of interest.

 

Last week, the Nikkei 225 moved above its assumed range. The upside was about 570 yen above our assumption and the downside was about 300 yen above the assumed line.

This week, the Nikkei 225 is expected to move between the Bollinger Band +2σ (currently around 42050 yen) on the upside and the 25-day line (currently around 39730 yen) on the downside.

This week will be a week of examining whether the quarterly earnings results of major U.S. companies indicate a recession and how they will affect the timing of interest rate cuts. In addition, the currency exchange rate is likely to cause a shift from foreign-demand driven to domestic-demand driven stocks, but the Nikkei 225 is likely to lose its current momentum.