[Fundamental viewpoint]
In the US markets last week, tech and semi-conductor stocks sold off, sending stock indices lower for the week.
Weekly change NY Dow: -0.15%, NASDAQ: -1.50%, S&P 500: -1.37%.
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 4.76 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 23.8 and the Nikkei 225's P/E ratio of 15.4 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 4.76 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 56.8 Or, the Nikkei 225 will be around 140,850 yen.
As a result, the Japanese market is undervalued by about 102,850 yen in the medium to long term.
From a fundamental perspective, the Japanese market can be said to be about 102,850 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 negative 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 is able to surpass the 25-day line.
② As a result of the earnings announcements, the expected ROE of the Nikkei 225 index stood at +8.8%, 0.2 percentage points worse than three months ago. The profit growth rate was +1.4%, 0.2 percentage points worse than three months ago.
③ Long-term interest rates in the US rose and the interest rate differential between the US and Japan widened from 3.30 to 3.45, causing the USD/JPY to move in a weaker direction in the range of 151 yen to 153 yen. The Dollar Index rose +0.00% 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 fourth week of October was oversold, the fifth week of October was likely oversold and this week is expected to be overbought. Of the five points, (i) was bearish last week.
[Technical viewpoint]
Looking at the Japanese market from a technical perspective, it is undervalued by 8.1 points in the medium to long term in terms of the difference in the 200-day divergence rate from the NASDAQ (about 3080 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is undervalued by 6.5 points in the medium to long term (about 2470 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 21.9 for the week. The Nikkei VI fell to a weekly low of 26.0. The US market is slightly pessimistic, as is the Japanese market.
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 -2.6% 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 below the 9-day, and 25-day lines, and above 200-day line. The NASDAQ is above the Ichimoku Chart cloud.
This is a “red 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 down 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.
The US presidential election will be the most closely watched event in the US markets this week. In addition, markets will focus on the Fed's monetary policy, the ISM Services PMI, the University of Michigan Consumer Confidence Index, manufacturing orders and corporate earnings. Globally, the focus will be on UK monetary policy decisions, German industrial production and manufacturing orders, Eurozone retail sales, Chinese trade statistics and services PMI, and inflation indicators.
Last week, the Nikkei 225 moved above its assumed range. The upper range was about 620 yen above the assumed range and the lower range was about 310 yen above the assumed line.
This week, the Nikkei 225 is expected to move between the Bollinger Band +2σ (currently around 39990 yen) on the upside and the Bollinger Band -2σ (currently around 37640 yen) on the downside.
The Nikkei 225 is likely to be volatile this week following the outcome of the US presidential election.
