Outlook for the Nikkei average this week [1 December 2024]

 [Fundamental viewpoint]

In the US markets last week, stock indices rose over the week, buoyed by Trump administration policies and appointments and lower long-term interest rates.

Weekly change NY Dow: +1.39%, NASDAQ: +1.13%, S&P 500: +1.06%.

                                                                                                 

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 4.35 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 23.0 and the Nikkei 225's P/E ratio of 15.5 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 4.35 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 47.5 Or, the Nikkei 225 will be around 117,110 yen.

As a result, the Japanese market is undervalued by about 78,900 yen in the medium to long term.

 

From a fundamental perspective, the Japanese market can be said to be about 78,900 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%, -0.2 percentage point worse than three months ago.

③    US long-term interest rates fell and the interest rate differential between the US and Japan narrowed from 3.33 to 3.14, with the dollar moving towards a range of 154 to 149 yen. The Dollar Index rose -1.59% 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 third week of November was oversold, the fourth week of November was likely oversold and this week is expected to be oversold. Last week, of the five points, ① was bullish and ③ and ⑤ were bearish.

 

[Technical viewpoint]

Looking at the Japanese market from a technical perspective, it is undervalued by 11.9 points in the medium to long term in terms of the difference in the 200-day divergence rate from the NASDAQ (about 4550 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is undervalued by 12.4 points in the medium to long term (about 4740 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 -2.3% and the divergence from the 200-day moving average is -1.1%. 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 “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.

 

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 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 ¥147.

 

This week, US markets will focus on the November jobs report and speeches by Fed officials, including Chairman Powell. Attention will also focus on the JOLT jobs report, the ISM manufacturing and services PMIs, the University of Michigan consumer confidence index, manufacturing orders and trade statistics. Globally, the Eurozone and Canadian unemployment rates, China's manufacturing and services PMIs, German manufacturing orders and industrial production will also be in focus.

 

Last week, the Nikkei 225 briefly moved above its assumed range. The upper range was about JPY 370 above the assumption and the lower range was about JPY 150 above the assumed line.

This week, the Nikkei 225 is expected to move between the Bollinger Band +1σ on the upside (currently around JPY 39170) and the Bollinger Band -2σ on the downside (currently around JPY 37660).

             

A full-scale rebound in the Nikkei 225 is likely to be difficult this week, unless semiconductor-related stocks revive.