Outlook for the Nikkei average this week [22 December 2024]

 [Fundamental viewpoint]

In the US markets last week, stock indices fell over the week as the US long-term interest rates rose after the Fed indicated that the pace of interest rate cuts in 2025 is expected to slow down.

Weekly change NY Dow: -2.25%, NASDAQ: -1.78%, S&P 500: -1.99%.

                                                                                                 

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 4.22 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 22.0 and the Nikkei 225's P/E ratio of 15.6 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 4.22 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 46.0 Or, the Nikkei 225 will be around 113,880 yen.

As a result, the Japanese market is undervalued by about 75,170 yen in the medium to long term.

 

Fundamentally, the Japanese market can be said to be about 75,170 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 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 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 0.3 percentage points compared to three months ago. The profit growth rate was +2.5%, a deterioration of -0.6 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 3.37 to 3.48, causing the dollar to move against the yen in the range of ¥153 to ¥157. The Dollar Index rose +0.81% 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 second week of December was likely to have been oversold and the third week of December overbought, and this week is expected to be oversold. Last week, of the five points, ① was a bearish factor and ③ was a bullish factor.

 

[Technical viewpoint]

Looking at the Japanese market from a technical perspective, it is undervalued by 11.1 points in the medium to long term in terms of the difference in the 200-day divergence rate from the NASDAQ (about 4300 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is undervalued by 5.2 points in the medium to long term (about 2010 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 18.4 for the week. The Nikkei VI rose to 23.7 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 within the equilibrium cloud. The overall divergence is +0.2% and the divergence from the 200-day moving average is +0.0%. As these three factors are positive, the medium-term trend has a ‘yellow light’.

 

In the U.S. market, the NYDow is below the 9-day, and 25-day lines, and above 200-day line. It is within the Ichimoku Chart cloud.

The NASDAQ is below the 9-day, and above 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 “yellow 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 no 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 ¥155 and ¥159.

 

In the US markets this week, the focus will be on the consumer confidence index, durable goods orders and new home sales. Globally, the focus will be on UK GDP, Japan's Bank of Japan Governor's speech and the Tokyo metropolitan area consumer price index.

 

Last week, the Nikkei 225 fell below its assumed range. The upper range was about JPY 70 below the assumption and the lower range was about JPY 500 below the assumed line.

The assumed range for the Nikkei 225 this week is expected to be between the Bollinger Band +1σ (currently around JPY 39370) on the upside and the Bollinger Band -1σ (currently around JPY 38340) on the downside.

             

This week is likely to be influenced by developments in US long-term interest rates, but is likely to hover within the expected range.