[Fundamental viewpoint]
In the U.S. market last week, stock indices rose over the week on expectations that stocks will continue to rise due to the resilience of the U.S. economy and strong quarterly earnings announcements, despite concerns about tensions in the Middle East.
Weekly change NY Dow: +1.21%, NASDAQ: +1.13%, S&P 500: +1.11%.
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 4.36 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 23.8and 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.
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 4.36 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 51.3 Or, the Nikkei 225 will be around 128,190 yen.
As a result, the Japanese market is undervalued by about 88,580 yen in the medium to long term.
From a fundamental perspective, the Japanese market can be said to be about 88,580 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 +8.8%, a deterioration of 0.2 percentage points from three months ago. The profit growth rate was +2.1%, an improvement of 1.5 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 widened from 3.10 to 3.16, causing the dollar/yen to move toward a weaker yen in the range of ¥147 to ¥149. The dollar index fell +0.42% 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 first week of October was likely overbought, the first week of October was likely overbought, and overbought is expected this week. Of the five points last week, ① and ③ and ⑤ were bullish.
[Technical viewpoint]
Looking at the Japanese market from a technical perspective, it is undervalued by 5.2 points in the medium to long term in terms of the difference in the 200-day divergence rate from the NASDAQ (about 2060 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is undervalued by 4.4 points in the medium to long term (about 1740 yen when calculated for the Nikkei 225).
Japanese markets are weak against the NY Dow and NASDAQ. The VIX, a measure of U.S. market volatility, rose to 20.5 for the week. The Nikkei VI fell to a weekly low of 28.7. 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 +12.4%. The divergence from the 200-day moving average was +4.2% since three 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 ¥149 and ¥146.
This week's US markets will focus on retail sales and speeches by Fed officials. The New York Fed Manufacturing Index, Industrial Production and Housing Starts will also be released. Meanwhile, earnings releases are scheduled for UnitedHealth, J&J, Bank of America, Abbott, Netflix and Procter & Gamble. Globally, the ECB's interest rate decision, industrial production in the eurozone and unemployment and inflation in the UK, retail sales, retail sales in China, industrial production, unemployment, fixed asset investment, GDP growth in the third quarter and inflation in Japan will be released.
Last week, the Nikkei 225 remained within its assumed range. The upper price was about JPY 340 below the assumption and the lower price was about JPY 1,190 above the assumed line.
The assumed range for the Nikkei 225 this week is expected to be between the Bollinger Band +2σ (currently around JPY 40300) on the upside and the 25-day line (currently around JPY 37780) on the downside.
The Nikkei 225 is likely to continue its upward trend this week, with volatility trending down and market overheating not so high.
