[Fundamental viewpoint]
In the US markets last week, stock indices rose over the week as Trump's inaugural announcements were generally well received and US long-term interest rates fell.
Weekly change NY Dow: +2.15%, NASDAQ: +1.65%, S&P 500: +1.74%.
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 4.10 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 22.3 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 4.10 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 115,290 yen.
As a result, the Japanese market is undervalued by about 75,360 yen in the medium to long term.
Fundamentally, the Japanese market can be said to be about 75,360 yen less attractive than the US market. Weakness in the Japanese market narrowed 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 +3.3%) 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 tokeep above the 25-day line.
② As a result of the earnings announcements, the forecasted ROE of the Nikkei 225 index stood at +9.1%, an improvement of +0.4 percentage points compared to three months ago. The profit growth rate was +2.4%, an improvement of +0.3 percentage points compared to three months ago.
③ US long-term interest rates fell and the interest rate differential between the US and Japan narrowed from 3.44 to 3.41, moving the yen against the dollar in the range of ¥156 to ¥154. The Dollar Index fell -1.77% on the week.
④ The OECD's nominal GDP growth rate for Japan and the U.S. in 2025 is expected to be +3.3% 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 January was likely to have been oversold, the third week of January overbought and this week is expected to be overbought. Of the five points, ① was bullish last week.
[Technical viewpoint]
Looking at the Japanese market from a technical perspective, it is undervalued by 7.4 points in the medium to long term in terms of the difference in the 200-day divergence rate from the NASDAQ (about 2950 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is undervalued by 4.5 points in the medium to long term (about 1800 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 14.9. The Nikkei VI fell to a weekly low of 19.7. The US market is optimistic and the Japanese market is slightly optimistic.
The Nikkei 225 is above the 9-day and 25-day lines. The short-term trend has a green light’.
The Nikkei 225 is above the equilibrium cloud. The overall divergence is +7.3% and the divergence from the 200-day moving average is +3.3%. As these three factors are negative, a ‘green light’ has been illuminated for the medium-term trend.
In the US market, the NY Dow is above the 9-day, 25-day and 200-day lines. It is also above the clouds of the equilibrium chart.
The NASDAQ is also above the 9-day, 25-day and 200-day lines. It is also above the clouds on the Ichimoku Chart.
This is a ‘green light’ in the short term and a ‘green light’ 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 up trend. The Japanese market is in a medium-term down trend, and the short-term is down trend.
Analysis of the foreign exchange market shows that the yen has turned weaker since bottoming out at the 140 yen level, which was reached in September 2024. This week, the yen is expected to fall to the ¥155to ¥153range.
This week's US markets will be focused on President Trump's policy announcements, the Fed's monetary policy decisions and corporate results from Microsoft, Meta, Tesla and Apple. There are also a number of economic indicators to be released this week, with GDP growth in the US, eurozone, Germany and France, US PCE data and preliminary inflation figures for Germany and France in focus. In China, markets will be closed from Tuesday for the Chinese New Year, but PMIs will be released.
Last week, the Nikkei 225 was above its expected range. The upper price was above by ¥1,000 and the lower price was above by ¥420.
This week, the Nikkei 225 is expected to move between Bollinger Band +3σ (currently around JPY 40890) on the upside and Bollinger Band +1σ (currently around JPY 38750) on the downside.
If US long-term interest rates continue to fall this week, the Nikkei 225 is likely to continue its upward trend.
