Outlook for the Nikkei average this week [12-August 2024]

 [Fundamental viewpoint]

In the U.S. market last week, the sharp decline in the Japanese market at the beginning of the week spilled over into the U.S. market, causing stock indices to fall over the week.

 

Weekly volatility NY Dow: -0.60%, NASDAQ: -0.18%, S&P 500: -0.04%.

                                                                                                 

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 4.48 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 21.9 and the Nikkei 225's P/E ratio of 14.4, 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 4.48 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 40.8 or if the Nikkei Index is around 98,99yen, the Nikkei Index will be at the same level as the current Nikkei Index price. 63,960yen,

From a fundamental perspective, the Japanese market can be said to be about 63,960 yen less attractive than the U.S. market. Last week, 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 positive last week. The daily chart is above the 200-day line and below the equilibrium cloud. This week, the focus will be 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 +8.7%, an improvement of 0.3 percentage points from three months ago. The profit growth rate was +1.9%, 3.4 percentage points worse than three months ago.

③    U.S. long-term interest rates rose and the interest rate differential between the U.S. and Japan widened from 2.86 to 3.11, causing the dollar/yen to move slightly weaker in the range of ¥141 to ¥147. The dollar index fell -0.06% 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 fifth week of July was oversold, the first week of August 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 7.9 points over the medium to long term in terms of the difference in 200-day divergence from the NASDAQ (about 2840 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is 6.9 points (about 2480 yen when converted to the Nikkei 225) undervalued the medium to long term.

 

J Japanese markets remain weak against the NY Dow and NASDAQ. The VIX, a measure of U.S. market volatility, declined to a weekly low of 20.4. The Nikkei VI rose to 45.3 for the week. The U.S. market is pessimistic and the Japanese market is quite pessimistic.

 

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 -24.0%. The divergence from the 200-day moving average was -5.1%. Since these tree factors are negative, a “red light” has been given to the medium-term trend.

 

In the U.S. market, the NYDow is below the 9-day, and 25-day lines, and below 200-day line. It is above the Ichimoku Chart cloud.

The NASDAQ is above the 200-day line but below the 9- and 25-day lines. The NASDAQ is below the Ichimoku Chart cloud.

This is a “red signal” in the short term and a “yellow signal” in the medium term.

 

[Outlook for this week]

Looking at the U.S. market in terms of fundamentals, we are aware of concerns of a recession 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.

 

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 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 toward appreciation after peaking at the 162 yen level, which was reached in June 2024. This week, a range of 146 yen to 148 yen is expected.

 

This week, the U.S. market will focus on the release of the Consumer Price Index (CPI) and Producer Price Index (PPI) and speeches by Fed officials. In addition, retail sales, the University of Michigan consumer confidence index, housing starts, and industrial production will be released. Globally, the UK's unemployment, inflation, and GDP growth will be in focus, as will China's house price index, retail sales, and unemployment rate, Japan's Q2 GDP growth, and Germany's ZEW business climate index.

 

Last week, the Nikkei 225 deviated above and below its assumed range. The upside was about 2,450 yen above our assumption and the downside was about 1,740 yen below the assumed line.

This week, the Nikkei 225 is expected to move between the Bollinger Band -1σ (currently around 35930 yen) on the upside and the Bollinger Band -2σ (currently around 33220 yen) on the downside.

 

This week is likely to be a week of closely watching economic indicators to be released to see if fears of another U.S. recession will return. The Nikkei 225 is likely to remain nervous, sensitive to currency movements.