Outlook for the Nikkei average this week [27-October 2024]

 [Fundamental viewpoint]

Stock indices were mixed during the week in the US market last week, with generally strong quarterly earnings announcements, but also due to a disappointing rise in long-term interest rates.

 

Weekly volatility NY Dow: -2.68%, NASDAQ: +0.16%, S&P 500: -0.96%.

                                                                                                 

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 4.70 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 15.3 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 4.70 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 54.3 Or, the Nikkei 225 will be around 134,820 yen.

As a result, the Japanese market is undervalued by about 96,900 yen in the medium to long term.

 

From a fundamental perspective, the Japanese market can be said to be about 96,900 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 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 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 0,9 percentage points from three months ago.

③    Long-term interest rates in the US rose and the interest rate differential between the US and Japan widened from 3.12 to 3.30, causing the USD/JPY to move in a weaker direction in the range of 149 yen to 153 yen. The Dollar Index rose +0.83% on 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 third week of October was oversold, the fourth week of October was likely oversold and this week is expected to be oversold. Of the five points, ⑤ was bearish last week.

 

[Technical viewpoint]

Looking at the Japanese market from a technical perspective, it is undervalued by 10.2 points in the medium to long term in terms of the difference in the 200-day divergence rate from the NASDAQ (about 3870 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is undervalued by 6.9 points in the medium to long term (about 2620 yen when calculated for the Nikkei 225).

 

Japanese markets are weak against the NY Dow and NASDAQ. The VIX, a measure of US market volatility, rose to 20.3 for the week. The Nikkei VI rose to 32.1 for the week. The US market is slightly pessimistic and the Japanese market is pessimistic.

 

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 above the Ichimoku Kinko Chart cloud. The Nikkei 225's overall divergence was -3.5% and the divergence from the 200-day moving average was -0.9%. As these two factors are negative, a ‘yellow 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 above the 9-day, and 25-day lines, and 200-day line. The NASDAQ is above the Ichimoku Chart cloud.

This is a “yellow 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.

 

Looking at the technical aspects, the U.S. market is in a medium-term up trend and a short-term no trend. The Japanese market is in a medium-term no trend, and the short-term is down 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 ¥150 and ¥153.

 

This week, the US markets will focus on the October employment report and the JOLTS jobs report. Other releases include the ISM Manufacturing PMI, the CB Consumer Confidence Index, the PCE Inflation Report and personal consumption and income statistics. In addition, Q3 earnings releases will follow. Globally, the Eurozone inflation and GDP growth, China's manufacturing and services business indices and Japan's central bank monetary policy will be released.

 

Last week, the Nikkei 225 fell below its assumed range. The upside was about JPY 1,390 below the assumed range and the downside was about JPY 930 below the assumed line.

This week, the Nikkei 225 is expected to move between the 25-day line (currently around JPY 38640) on the upside and Bollinger Band -2σ (currently around JPY 37220) on the downside.

 

The Nikkei 225 is likely to weaken further this week, depending on the results of the lower house election, due to political turmoil.