[Fundamental viewpoint]
In the US market last week, stock indices rose over the week as the economic indicator economy showed resilience.
Weekly change NY Dow: +1.964%, NASDAQ: +1.73%, S&P 500: +1.68%.
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 4.72 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 24.6 and 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 4.72 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 61.4 Or, the Nikkei 225 will be around 148,070 yen.
As a result, the Japanese market is undervalued by about 110,040 yen in the medium to long term.
From a fundamental perspective, the Japanese market can be said to be about 110,040 yen less attractive than the U.S. market. Weakness in the Japanese market has been magnified.
[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 +3.0%) 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 is able to keep above the 25-day line.
② As a result of the earnings announcements, the expected ROE of the Nikkei 225 index stood at +9.1%, an improvement of 0.3 percentage points compared to three months ago. The profit growth rate was +1.9%, -0.6 percentage point worse than three months ago.
③ Although long-term interest rates in the US declined and the interest rate differential between the two countries narrowed from 3.38 to 3.33, the dollar moved in a weaker direction against the yen in the range of 153 to 155 yen. The Dollar Index rose +0.77% 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 November was overbought, the third week of November was likely overbought and this week is expected to be overbought. Last week, of the five points, ① was bullish. This week, ①, ②, ③ and ⑤ are expected to have an impact.
[Technical viewpoint]
Looking at the Japanese market from a technical perspective, it is undervalued by 10.9 points in the medium to long term in terms of the difference in the 200-day divergence rate from the NASDAQ (about 4140 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is undervalued by 10.9 points in the medium to long term (about 4140 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 15.2. The Nikkei VI rose to 24.8 for the week. The US market is optimistic and the Japanese market is 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 within the equilibrium cloud. The overall divergence is -0.9% and the divergence from the 200-day moving average is -0.8%. 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 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 “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 up 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 ¥153 and ¥156.
This week, the US markets will focus on the FOMC minutes, the PCE price index, personal income and expenditure statistics, revised third quarter GDP growth and the Conference Board consumer confidence index. In addition, durable goods orders and housing-related indicators will also be in focus. Globally, the Australian and Eurozone inflation figures, the German unemployment rate, the Ifo business climate index, the Gfk consumer confidence index, retail sales, Japanese retail sales, industrial production, the unemployment rate, housing starts and the consumer confidence index will be released.
Last week, the Nikkei 225 moved within its expected range. The upside was about 250 yen below the assumed range and the downside was about 230 yen above the assumed line.
This week, the Nikkei 225 is expected to move between the 25-day line (currently around JPY 38700) on the upside and Bollinger Band -2σ (currently around JPY 37680) on the downside.
It is likely to be difficult for the Nikkei 225 to turn the uptrend around this week, unless interest rate cuts in the US market and semi-conductor stocks revive.
