Outlook for the Nikkei average this week [21-July 2024]

[Fundamental viewpoint]

In the U.S. market last week, stock indices were mixed as semiconductor stocks and other high-tech stocks sold off due to concerns about tighter regulations against China and uncertainty over the situation in Taiwan from comments by President-elect Trump.

 

Weekly volatility NY Dow: +0.72%, NASDAQ: -3.65%, S&P 500: -1.97%.

                                                                                                 

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 3.67 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 17.0, 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 3.67 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 45.5 or if the Nikkei Index is around 107,050 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 66,980 yen less attractive than the U.S. 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 +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 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 +1.2%, 11.1 percentage points worse than three months ago.

③    Long-term interest rates in the U.S. rose lower and the interest rate differential between the U.S. and Japan widened from 3.13 to 3.21, moving the yen against the dollar in the range of ¥157 to ¥158. The dollar index rose +0.27% 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    TThe second week of July was likely overbought, the third week of July was likely oversold, and this week is expected to be oversold. Of the five points last week, ① and ③ were bearish.

 

[Technical viewpoint]

Looking at the Japanese market from a technical perspective, it is undervalued by 3.0 points over the medium to long term in terms of the difference in 200-day divergence from the NASDAQ (about 1200 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is 3.0 points (about 1200 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 16.5 for the week. The Nikkei VI rose to 19.5 for the week. We are somewhat optimistic for the U.S. market and somewhat pessimistic for the Japanese market.

 

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 above the Ichimoku Kinko Chart. The Nikkei 225's total divergence was +12.3%, and its divergence from the 200-day moving average was +9.7%. 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 below the 9-day line and the 25-day line and above the 200-day line. It is above the Ichimoku Kinko's cloud.
This is a " yellow 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 157 to 159 range this week.

 

In the U.S. markets this week, the main focus will be on the preliminary Q2 GDP growth and PCE price index. Also of interest will be the S&P Global Manufacturing and Services PMIs, durable goods orders, and the number of existing home sales. Globally, the manufacturing and services PMIs for Japan, the Eurozone, and the U.K., the monetary policy of the People's Bank of China, and the GDP growth rate for South Korea will also be of interest.

 

Last week, the Nikkei 225 fell below its assumed range. The upside was about 680 yen below our assumption and the downside was about 180 yen below the assumed line.

This week, the Nikkei 225 is expected to move between the 25-day line (currently near ¥40000) on the upside and Bollinger Band -2σ (currently near ¥37680) on the downside.

 

This week will likely be another week of examining U.S. economic indicators and quarterly results from major companies to see if they indicate a recession and how they will affect the timing of interest rate cuts, but the Nikkei 225 is likely to continue to adjust.