Outlook for the Nikkei average this week [8-September 2024]

 [Fundamental viewpoint]

In the U.S. market last week, stock indices fell sharply during the week as profit-taking spread among semiconductors and other high-tech stocks due to concerns about economic recession following the release of economic indicators.

 

Weekly volatility NY Dow: -2.93%, NASDAQ: -5.77%, S&P 500: -4.25%.

                                                                                                 

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 4.07 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 22.6 and the Nikkei 225's P/E ratio of 15.1, 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 4.07 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 39.1 or if the Nikkei Index is around 94,240yen, the Nikkei Index will be at the same level as the current Nikkei Index price. 57,850yen,

From a fundamental perspective, the Japanese market can be said to be about 57,850 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 negative 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 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 earnings announcements, the forecasted ROE for the Nikkei 225 index came in at +8.8%, a deterioration of 0.2 percentage points from three months ago. The profit growth rate was +2.3%, an improvement of 1.3 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 3.02 to 2.87, moving the yen against the dollar in the range of ¥147 to ¥141. The dollar index fell -0.53% 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 fourth week of August was oversold, the first week of September was likely oversold, and this week is expected to be oversold. Of the five points last week, ① and ③,⑤ were bearish.

 

[Technical viewpoint]

Looking at the Japanese market from a technical perspective, it is undervalued by 4.9 points in the medium to long term in terms of the difference in the 200-day divergence rate from the NASDAQ (about 1,780 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is undervalued by 6.7 points in the medium to long term (about 2,440 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 22.4 for the week. The Nikkei VI rose to 29.1 for the week. Both the U.S. and Japanese markets are 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 under the Ichimoku Kinko Chart's cloud. The Nikkei 225's divergence ratio is -1.0%. The divergence from the 200-day moving average was -2.9% since these three factors are positive, 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 above 200-day line. It is above the Ichimoku Chart cloud.

The NASDAQ is below the 9-day, and 25-day lines, and above 200-day line. 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 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 141 yen to 144 yen is expected.

 

Inflation will be the focus of attention in the U.S. markets this week with the release of the Consumer Price Index and the Producer Price Index. Attention will also be focused on the presidential candidates' televised debate and the University of Michigan Consumer Attitude Index. Globally, the Eurozone interest rate decision, industrial production, China's CPI and PPI, the U.K. unemployment rate, and industrial production will likely be in focus.

 

Last week, the Nikkei 225 fell below its assumed range. The upside was about 1,640 yen below our assumption and the downside was about 710 yen below the assumed line.

This week, the Nikkei 225 is expected to move between the 25-day line (currently around 36950 yen) on the upside and Bollinger Band -2σ (currently around 33540 yen) on the downside.

 

This week, the Nikkei 225 is likely to continue its search for a second bottom as fears of a recession hover in the U.S. market and semiconductor-related stock selling continue.