[Fundamental viewpoint]
Stock indices were mixed on the week in the US markets last week, with high support from tech stocks amid continued concerns over the US high tariff policy.
Weekly volatility NY Dow: -0.07%, NASDAQ: +1.51%, S&P 500: +0.59%.
On the other hand, medium- to long-term
risks include concerns about a prolonged conflict in Ukraine, tariff policies
of the U.S. administration, 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. Furthermore, 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 3.96 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 23.8and the Nikkei 225's P/E ratio of 15.7 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 3.96 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 41.3 Or, the Nikkei 225 will be around 104,930 yen.
As a result, the Japanese market is undervalued by about 65,110 yen in the medium to long term.
Fundamentally, the Japanese market can be said to be about 65,110 yen less attractive than the US market. Weakness in the Japanese market improved 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 in the crosshairs last week. The daily is above the 200-day line and above the clouds on the Ichimoku Chart.2) The weekly leg of the NASDAQ was positive. The daily is above the 200-day line and above the clouds on the Ichimoku Chart. This week, the focus will be on whether the NY Dow can keep above the 25-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 was -3.8%, a deterioration of -10.5 percentage points compared to three months ago.
③ The US long-term interest rate rose and the interest rate differential between the US and Japan narrowed from 2.90 to 2.89, but the dollar moved in a weaker direction against the yen in the range of ¥146 to ¥149. The Dollar Index rose +0.61% 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 July was overbought, the third week of July was likely overbought and this week is expected to be overbought. Of the five points, ③ was bullish last week.
[Technical viewpoint]
From a technical perspective, the Japanese market is undervalued by 6.2 points in the medium to long term in terms of the difference in the 200-day divergence rate from the NASDAQ (about 2470 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is overvalued by 0.7 point in the medium to long term (about 270 yen when converted to the Nikkei 225).
The Japanese market is slightly stronger than the NY Dow and weaker than the NASDAQ. The VIX, a measure of US market volatility, was unchanged at 16.4 for the week. The Nikkei VI rose to 24.8 for the week. The US market is optimistic and the Japanese market is ‘skeptical’.
The Nikkei 225 is above the 9-day line and the 25-day line. The short-term trend is now showing a “green signal.
The Nikkei 225 is above the Ichimoku Kinko's Kumo (equilibrium) cloud. The overall divergence was +12.1%, while the 200-day moving average divergence was +4.3%. As all three factors are positive, the medium-term trend has a "green light".
In the US market, the NY Dow is below the 9-day line and above 25-day and 200-day lines. It is above the clouds of the Ichimoku chart.
The NASDAQ is above the 9-day line and 25-day and 200-day lines. It is above the clouds above the Ichimoku Chart.
It is a ‘yellow 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 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 up trend and a short-term no trend. The Japanese market is in a medium-term up 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 147 and 150 yen.
The focus in the US markets this week will continue to be on whether and how a trade agreement is reached. The US earnings season is in full swing, with major companies such as Alphabet, Tesla, Verizon, Coca-Cola and IBM due to announce their quarterly results. Key US economic indicators of note will include the preliminary S&P Global PMI, durable goods orders, existing home sales and new home sales. Globally, the ECB's monetary policy decisions will be in focus. Markets will also see the release of economic indicators, including PMIs for the eurozone, Germany, Japan, India, the UK and France, the German and UK consumer confidence indices, the German Ifo business confidence index, UK retail sales and the Tokyo consumer price index (CPI). In addition, investors will be closely monitoring the results of the Japanese House of Councillors elections.
Last week, the Nikkei 225 remained within the expected range. The upper price was below ¥530 and the lower price was above ¥50.
This week, the Nikkei 225 is expected to move between the Bollinger Band +2σ (currently around JPY 40620) on the upside and the 25-day line (currently around JPY 39410) on the downside.
Again this week, whether or not the Nikkei 225 can remain above the 25-day line will be important in predicting the future.
