[Fundamental viewpoint]
In the US markets last week, stock indices fell on the week due to a sharp rise in long-term bond yields and uncertainty over tariffs.
Weekly change NY Dow: -2.47%, NASDAQ: -2.47%, S&P 500: -2.61%.
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 3.89 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 22.1 and the Nikkei 225's P/E ratio of 15.3 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 3.89 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 38.0 Or, the Nikkei 225 will be around 92,070 yen.
As a result, the Japanese market is undervalued by about 54,910 yen in the medium to long term.
Fundamentally, the Japanese market can be said to be about 54,910 yen less attractive than the US market. Weakness in the Japanese market widened somewhat 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 negative last week. The daily is above the 200-day line and the clouds on the Ichimoku Chart. The weekly leg of the NASDAQ was negative. The daily is above the 200-day line and the clouds of the Ichimoku Chart. This week, the focus will be on whether the NY Dow can hold above the 200-day line..
② As a result of the earnings announcements, the expected ROE of the Nikkei 225 stocks was +9.1%, a deterioration of -0.1 percentage points compared to three months ago. Profit growth came in at -4.2%, a deterioration of -11.2 percentage points compared to three months ago.
③ Although long-term interest rates in the US rose, the interest rate differential between the two countries narrowed from 3.04 to 2.99, and the dollar moved towards a stronger yen in the range of ¥145 to ¥142. The Dollar Index fell -1.85% 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 third week of May was overbought, the fourth week of May was likely overbought and this week is expected to be overbought. Of the five points, ① and ③ were bearish last week..
[Technical viewpoint]
Looking at the Japanese market from a technical perspective, it is undervalued by 3.1 point in the medium to long term in terms of the difference in 200-day divergence from the NASDAQ (about 1150 yen in terms of the Nikkei 225). On the other hand, the difference in 200-day divergence from the NYDow is overvalued by 0.3 points in the medium to long term (about 50 yen in terms of the Nikkei 225).
Japanese markets turned stronger against the NY Dow and weaker against the NASDAQ. The VIX, an indicator of US market volatility, rose to 22.3 for the week. The Nikkei VI rose to 24.2 for the week. The US and Japanese markets are in a state of ‘doubt’..
The Nikkei 225 is below the 9-day and above 25-day lines. The short-term trend has a "yellow light".
The Nikkei 225 is above the Ichimoku Chart cloud. The overall divergence was +1.2%, while the 200-day moving average divergence was -1.7%.One factor being negative, which is a ‘yellow light’ for the medium-term trend.
In the US market, the NY Dow is below the 9-day line and above 25-day and below 200-day lines. It is above the clouds of the equilibrium chart.
The NASDAQ is below the 9-day line and above 25-day and 200-day lines. It is above the clouds above the Ichimoku Chart.
This is a ‘yellow light’ in the short term and a yellow light’ in the medium term.
[Outlook for this week]
Looking at the US market from a fundamental perspective, recessionary fears are amplified in the near-term. Other risk factors include inflation and rising interest rates due to the Russia-Ukraine war, recession due to energy shortages and deteriorating political conditions in the EU bloc, US-China trade friction, financial market turmoil caused by the bursting of China's property 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 no trend.
Analysis of the foreign exchange market shows that the yen has turned stronger since topping out at 156 yen, which was reached in January 2025. This week, the yen is expected to be between 143 and 140 yen.
This week's US markets are likely to be disturbed by President Trump's new tariff offensive targeting the EU and Apple. Also of interest are comments from Fed officials, FOMC minutes, PCE price index, durable goods orders, trade balance, revised Q1 GDP growth, NVIDIA results and the S&P/Case-Shiller house price index. Globally, inflation statistics for France and Germany, India's Q1 GDP, Germany's GfK consumer confidence index, Japan's industrial production and retail sales, and the consumer confidence index will be released.
Last week, the Nikkei 225 fell below its expected range. The upside was below ¥1100 and the downside was above ¥800.
This week, the Nikkei 225 is expected to move between the Bollinger Band +2σ (currently around JPY 39060) on the upside and the 25-day line (currently around JPY 36380) on the downside.
This week, the Nikkei 225 is likely to be interested in whether or not it can maintain above the 25-day line.