Outlook for the Nikkei average this week [29-September 2024]

 [Fundamental viewpoint]

In the U.S. markets last week, the stock indices rose over the week as Micron Technology's strong earnings led to a rally in semiconductor stocks and hopes that the U.S. economy can make a soft landing.

 

Weekly change NY Dow: +0.59%, NASDAQ: +0.95%, S&P 500: +0.62%.

                                                                                                 

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 for 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 S&P 500's P/E ratio of 23.7 and the Nikkei 225's P/E ratio of 16.1, the difference between the U.S. and Japanese interest rates, and the difference in GDP growth rates.

In order for the U.S. and Japanese markets to be in equilibrium, the following conditions must be met.

The difference in GDP growth between Japan and the U.S. in 2025 relative to the current price of the Nikkei 225 will be 4.00 percentage points larger than the OECD forecast. (Japan is revised downward or the U.S. is revised upward). Or the current year's forecast PER for stocks in the Nikkei Stock Average becomes about 45.3. Or, the Nikkei 225 will be around 111,990 yen.

As a result, the Japanese market is undervalued by about 72,160 yen in the medium to long term.

 

From a fundamental perspective, the Japanese market can be said to be about 72,160 yen 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 +2.5%, an improvement of 1.2 percentage points from three months ago.

③    Although U.S. long-term interest rates rose and the interest rate differential between the U.S. and Japan widened from 2.91 to 2.92, the U.S. dollar moved toward a stronger yen in the range of ¥146 to ¥142. The dollar index fell -0.32% for the week.

④    The OECD's nominal GDP growth rate for Japan and the U.S. in 2025 is expected to be +3.0% for Japan and +3.9% for the U.S., so the Japanese market is 0.9 percentage points inferior in this aspect.

⑤    The third week of September was likely oversold, the fourth week of September was likely overbought, and this week is expected to be oversold. 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 3.5 points in the medium to long term in terms of the difference in the 200-day divergence rate from the NASDAQ (about 1,390 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is undervalued by 2.3 points in the medium to long term (about 920 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, rose to 17.0 for the week. The Nikkei VI rose to 26.5 for the week. 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 above the Ichimoku Kinko Chart's cloud. The Nikkei 225's divergence ratio is +15.6%. The divergence from the 200-day moving average was +5.6% since two factors are positive, a “green 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 up trend and a short-term up trend. The Japanese market is in a medium-term up 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 162 yen in June 2024. This week, we expect the yen to be between ¥143 and ¥140.

 

In the U.S. markets this week, the September jobs report and speeches by Fed Chairman Jerome Powell and several Fed officials will be the main focus of market attention. Other data of interest include the JOLTS job openings report, ISM manufacturing and services PMIs, and new orders for manufacturing. Globally, Eurozone inflation and China's manufacturing and services PMIs will be of interest. In Japan, industrial production, retail sales, unemployment rate, consumer confidence index, and the Bank of Japan's Tankan will be released.

 

Last week, the Nikkei 225 moved slightly above its assumed range. The upside was about 100 yen above our assumption and the downside was about 410 yen above the assumed line.

This week, the Nikkei 225 is expected to move between the Bollinger Band +1σ (currently around 38650 yen) on the upside and the Bollinger Band -1σ (currently around 36490 yen) on the downside.

 

This week, the Nikkei 225 is likely to search for a new equilibrium point after falling sharply at the beginning of the week due to the market's missed expectations of the birth of Governor Takaichi.