Outlook for the Nikkei average this week [16-September 2024]

 [Fundamental viewpoint]

In the U.S. markets last week, stock indices rose sharply during the week on expectations that the FOMC will extend the interest rate cut to 0.5% following the release of economic indicators showing subdued inflation.

 

Weekly change NY Dow: +2.60%, NASDAQ: +5.95%, S&P 500: +4.02%.

                                                                                                 

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 U.S. and Japanese markets is 4.12 percentage points undervalued in the Japanese market when the OECD's nominal GDP forecast for 2025 is taken into account. The reason for the undervaluation is the difference between the P/E ratio of 22.7 for the S&P 500 and 14.9 for the Nikkei 225, the difference in interest rates between Japan and the U.S., 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 4.12 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 becomes about 38.6, or if the Nikkei Average is about 94,780 The Japanese market is undervalued by about 58,190 yen in the medium to long term because the Japanese and U.S. markets can be interpreted as being in equilibrium when the Nikkei 225 is about 94,780 yen.

 

From a fundamental perspective, the Japanese market can be said to be about ¥58,190 less attractive than the U.S. market. Weakness in the Japanese market was somewhat 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 above 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 +8.7%, a deterioration of 0.2 percentage points from three months ago. The profit growth rate was +2.2%, an improvement of 1.5 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 2.87 to 2.82, moving the yen against the dollar in the range of ¥143 to ¥140. The dollar index fell -0.07% 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 September was oversold, the second week of September was likely oversold, and this week is expected to be oversold. Last week, of the five points, ① was bullish and ③ and ⑤ were bearish.

 

[Technical viewpoint]

Looking at the Japanese market from a technical perspective, it is undervalued by 10.1 points in the medium to long term in terms of the difference in the 200-day divergence rate from the NASDAQ (about 3,690 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is undervalued by 8.8 points in the medium to long term (about 3,220 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 16.6. The Nikkei VI fell to a weekly low of 28.8. The U.S. market is optimistic and the Japanese market is volatile.

 

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 within the Ichimoku Kinko Chart's cloud. The Nikkei 225's divergence ratio is -9.3%. The divergence from the 200-day moving average was -2.6% since these three 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 above the Ichimoku Chart cloud.

This is a “green signal” in the short term and a “green 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 137 yen to 142 yen is expected.

 

In the U.S. markets this week, attention will be focused on the range of interest rate cuts to be decided by the FOMC. Also, the New York Fed manufacturing index for September, retail sales for August, industrial production for August, and housing starts for August will likely be in focus. Globally, the UK CPI, interest rate decision, retail sales, and Japanese interest rate decision will likely be in focus.

 

Last week, the Nikkei 225 remained within the assumed range. The upside was about 350 yen below our assumption and the downside was about 530 yen above the assumed line.

This week, the Nikkei 225 is expected to move between the 25-day line (currently around 37330 yen) on the upside and Bollinger Band -2σ (currently around 35210 yen) on the downside.

 

This week, the US market is likely to be concerned with concerns of a recession and the extent of interest rate cuts. In the Japanese market, the dollar/yen market is likely to be affected by these factors, and the market will be both happy and sad.