Outlook for the Nikkei average this week [20-October 2024]

 [Fundamental viewpoint]

In the US markets last week, semiconductor equipment stock ASML's cautious earnings outlook is a cause for concern, but generally strong quarterly earnings announcements helped lift stock indices over the week.

 

Weekly change NY Dow: +0.96%, NASDAQ: +0.80%, S&P 500: +0.85%.

                                                                                                 

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 4.46 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 24.2 and the Nikkei 225's P/E ratio of 15.7 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 4.46 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 52.1 Or, the Nikkei 225 will be around 129,530 yen.

As a result, the Japanese market is undervalued by about 90,550 yen in the medium to long term.

 

From a fundamental perspective, the Japanese market can be said to be about 908,550 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 +1.6%, an improvement of 0,8 percentage points from three months ago.

③    Although long-term interest rates in the US declined and the interest rate differential between the two countries narrowed from 3.16 to 3.12, the dollar moved towards a weaker yen in the range of ¥148 to ¥150. The Dollar Index rose +0.53% on 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 second week of October was likely overbought, the third week of October was oversold and this week is expected to be oversold. Of the five points, ② and ⑤ were bearish last week.

 

[Technical viewpoint]

Looking at the Japanese market from a technical perspective, it is undervalued by 7.5 points in the medium to long term in terms of the difference in the 200-day divergence rate from the NASDAQ (about 2920 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is undervalued by 7.1 points in the medium to long term (about 2770 yen when calculated for the Nikkei 225).

 

Japanese markets remain weak against the NY Dow and NASDAQ. The VIX, a measure of US market volatility, fell to a weekly low of 18.0. The Nikkei VI fell to a weekly low of 26.4. The US market is slightly optimistic and the Japanese market is volatile.

The Nikkei 225 is below the 9-day and above 25-day lines. This is a “yellow light” for the short-term trend.

The Nikkei 225 is above the Ichimoku Kinko Chart's cloud. The Nikkei 225's divergence ratio is +5.9%. The divergence from the 200-day moving average was +2.2% 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 no 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 ¥148 and ¥150.

 

This week in the US markets, major companies such as Tesla, Coca-Cola, 3M, GM and Verizon will release their quarterly results. In addition, PMIs, durable goods orders and existing and new home sales are due to be released. Globally, the Eurozone and UK consumer confidence indices, manufacturing and services PMIs from Japan, France, Germany and the UK, and monetary policy from Canada will be released.

 

Last week, the Nikkei 225 remained within its assumed range. The upper price was about 260 yen below the assumption and the lower price was about 650 yen above the assumed line.

The assumed range for the Nikkei 225 this week is expected to be between the Bollinger Band +2σ (currently around 40620 yen) on the upside and the 25-day line (currently around 38250 yen) on the downside.

 

This week, the Nikkei 225 is likely to continue to adjust, but the market is likely to be both happy and sad about the expected results of the House of Representatives election.