Outlook for the Nikkei average this week [1-September 2024]

 [Fundamental viewpoint]

In the U.S. markets last week, stock indices were mixed for the week, with the prospect of a Fed rate cut buying up economically sensitive stocks, while semiconductor-related stocks sold off.

 

Weekly change NY Dow: +0.94%, NASDAQ: -0.92%, S&P 500: +0.24%.

                                                                                                 

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 4.00 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 23.1 and the Nikkei 225's P/E ratio of 15.8, 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 4.00 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 43.1 or if the Nikkei Index is around 105,260yen, the Nikkei Index will be at the same level as the current Nikkei Index price. 66,610yen,

From a fundamental perspective, the Japanese market can be said to be about 66,610 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 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 forecasted ROE for the Nikkei 225 index came in at +8.8%, a deterioration of 0.1 percentage points from three months ago. The profit growth rate was +2.1%, an improvement of 1.8 percentage points from three months ago.

③    U.S. long-term interest rates rose and the interest rate differential between the U.S. and Japan narrowed from 2.92 to 3.02, moving the yen against the dollar in the range of ¥143 to ¥146. The dollar index rose +1.05% 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 August was likely oversold, the fourth week of August was likely overbought, and this week is expected to be overbought. Of the five points last week, ③ was bullish.

 

[Technical viewpoint]

Looking at the Japanese market from a technical perspective, it is undervalued by 5.3 points in the medium to long term in terms of the difference in the 200-day divergence rate from the NASDAQ (about 2,050 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is undervalued by 4.0 points in the medium to long term (about 1,550 yen when calculated for the Nikkei 225).

 

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 15.0. The Nikkei VI declined to a weekly low of 21.3. 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 +7.5%. The divergence from the 200-day moving average was +3.4% 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 below the 9-day, and above 25-day lines, and 200-day line. 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 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 145 yen to 148 yen is expected.

 

This week, the U.S. market will focus on the August employment report. In addition, the ISM Manufacturing Index for August, the July Job Openings Labor Survey (JOLTS), and the ISM Non-Manufacturing Index for August will be released. Globally, China's PMI, Canada's policy rate, Eurozone retail sales, and GDP will be released.

 

Last week, the Nikkei 225 remained within the assumed range. The upper price was about 1950 yen below our assumption and the lower price was about 600 yen above the assumed line.

This week, the Nikkei 225 is expected to move between the Bollinger Band +2σ (currently around 40630 yen) on the upside and the 25-day line (currently around 37120 yen) on the downside.

 

This week will be the week to see if the economic indicators to be released will change the soft landing scenario expected by the market. The Nikkei 225 is expected to continue its upward trend based on the U.S. market indices and currency movements.