Outlook for the Nikkei average this week [18-August 2024]

[Fundamental viewpoint]

In the U.S. markets last week, stock indices rose sharply during the week as inflation settled and excessive fears of an economic downturn receded in the wake of economic indicators released this week.

 

Weekly change NY Dow: +2.94%, NASDAQ: +5.29%, S&P 500: +3.93%.

                                                                                                 

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 3.95 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 22.5 and the Nikkei 225's P/E ratio of 15.7, 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 3.95 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 41.4 or if the Nikkei Index is around 100,320yen, the Nikkei Index will be at the same level as the current Nikkei Index price. 62,250yen,

From a fundamental perspective, the Japanese market can be said to be about 62,250 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 positive 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 keep above the 25-day line.

②    As a result of the earnings announcements, the ROE forecast for the Nikkei 225 index came in at +8.8%, an improvement of 0.1 percentage point from three months ago. The profit growth rate was +2.3%, an improvement of 0.5 percentage points from three months ago.

③    U.S. long-term interest rates declined and the interest rate differential between the U.S. and Japan narrowed from 3.11 to 3.02, but the dollar-yen exchange rate moved toward a weaker yen in the range of 146 to 149 yen. The dollar index fell -0.73% 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 August was overbought, the second week of August was likely overbought, and this week is expected to be overbought. Of the five points last week, ① and ③ were bullish.

 

[Technical viewpoint]

Looking at the Japanese market from a technical perspective, it is undervalued by 6.6 points over the medium to long term in terms of the difference in 200-day divergence from the NASDAQ (about 2510 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is 3.1 points (about 1180 yen when converted to the Nikkei 225) undervalued the medium to long term.

 

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 14.8. The Nikkei VI fell to a weekly low of 26.5. The U.S. market is optimistic and the Japanese market is volatile.

 

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

The Nikkei 225 is under the Ichimoku Kinko Chart's cloud. The Nikkei 225's divergence ratio is +1.6%. The divergence from the 200-day moving average was +2.8% since these tow factors are positive, a “yellow light” has been given to the medium-term trend.

 

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

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

This is a “green 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 up 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 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 FOMC meeting minutes and the Fed Chairman's speech at the Jackson Hole meeting. In addition, the August Manufacturing Purchasing Managers' Index (PMI), Existing Home Sales, and New Home Sales will be released. Globally, the focus will be on the Canadian inflation rate, China's interest rate decision, and the manufacturing and services PMIs in the Eurozone.

 

Last week, the Nikkei average moved above its assumed range. The upside was about 200 yen above our assumption and the downside was about 2,440 yen above the assumed line.

This week, the Nikkei 225 is expected to move between the Bollinger Band +1σ on the upside (currently around 40460 yen) and the Bollinger Band -1σ on the downside (currently around 35430 yen).

 

This week will be a week of deciphering the reality of recession and the timing of interest rate cuts in the message from the U.S. Fed. The Nikkei 225 is likely to seek the near-term peak of the rebound based on the movement of U.S. long-term interest rates.