Outlook for the Nikkei average this week [15 December 2024]

 [Fundamental viewpoint]

In the US markets last week, stock indices were mixed over the week, with US long-term interest rates rising due to semi-confidence in the short-term policy rate outlook, but uncertainty over the longer term.

Weekly volatility NY Dow: -1.82%, NASDAQ: +0.34%, S&P 500: -0.64%.

                                                                                                 

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 4.09 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 22.4 and the Nikkei 225's P/E ratio of 15.9 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 4.09 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 45.5 Or, the Nikkei 225 will be around 112,840 yen.

As a result, the Japanese market is undervalued by about 73,370 yen in the medium to long term.

 

Fundamentally, the Japanese market can be said to be about 73,370 less attractive than the US market. Weakness in the Japanese market was 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 +3.0%) 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 is able to return above the 25-day line.

②    As a result of the earnings announcements, the expected ROE of the Nikkei 225 stocks was +9.1%, an improvement of 0.4 percentage points compared to three months ago. The profit growth rate was +2.1%, a deterioration of -0.4 percentage points compared to three months ago.

③    Long-term interest rates in the US rose and the interest rate differential between the US and Japan widened from 3.11 to 3.37, causing the dollar to move against the yen in the range of ¥149 to ¥153. The Dollar Index rose +0.92% on the week.

④    The OECD's nominal GDP growth rate for Japan and the U.S. in 2025 is expected to be +3.3% for Japan and +4.4% for the U.S., so the Japanese market is 1.1 percentage points inferior in this aspect.

⑤    The first week of December was overbought, the second week of December was likely overbought and this week is expected to be oversold. Of the five points, ① and ③were bullish last week.

 

[Technical viewpoint]

Looking at the Japanese market from a technical perspective, it is undervalued by 11.7 points in the medium to long term in terms of the difference in the 200-day divergence rate from the NASDAQ (about 4620 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is undervalued by 5.8 points in the medium to long term (about 2290 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, rosel to a weekly low of 13.8. The Nikkei VI fell to 22.2 for the week. The US market is optimistic and the Japanese market is volatile.

 

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

The Nikkei 225 is above the equilibrium cloud. The overall divergence is +6.3% and the divergence from the 200-day moving average is +2.0%. As these three factors are positive, the medium-term trend has a ‘green light’.

 

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 US market from a fundamental perspective, recessionary fears are receding 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 up 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 ¥152 and ¥155.

 

This week's US markets will focus on the Fed's interest rate decision. Other US market highlights include retail sales, the PCE price index, the finalised GDP for July-September, industrial production, housing starts and used home sales. Globally, China's industrial production and retail sales, unemployment rate, UK interest rate decision and inflation, Japan's interest rate decision and inflation, Germany's Ifo business sentiment and Eurozone PMIs will be released.

 

Last week, the Nikkei 225 moved above its assumed range. The upper range was about 210 yen above the assumed range and the lower range was about 1180 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 JPY 39880) on the upside and the 25-day line (currently around JPY 38830) on the downside.

             

This week is likely to be influenced by interest rate decisions in the US and Japan, but is likely to be within the expected range.