[Fundamental viewpoint]
In the US markets last week, price indexes fell below market expectations and fears of inflation faded, leading to lower long-term US interest rates and weekly gains in stock indices.
Weekly change NY Dow: +3.69%, NASDAQ: +2.45%, S&P 500: +0.79%.
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 4.53 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 23.4 and the Nikkei 225's P/E ratio of 15.5 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 4.53 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 51.9 Or, the Nikkei 225 will be around 128,740 yen.
As a result, the Japanese market is undervalued by about 90,290 yen in the medium to long term.
Fundamentally, the Japanese market can be said to be about 90,290 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 within 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 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 +2.1%, a deterioration of -0.1 percentage points compared to three months ago.
③ Long-term interest rates in the US fell and the interest rate differential between the two countries narrowed from 3.57 to 3.44, moving the dollar towards a stronger yen in the range of ¥158 to ¥154. The Dollar Index fell -0,21% 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 January was likely to have been overbought, the second week of January was likely to have been oversold and this week is expected to be overbought. Last week, of the five points, ① was bearish.
[Technical viewpoint]
Looking at the Japanese market from a technical perspective, it is undervalued by 10.0 points in the medium to long term in terms of the difference in the 200-day divergence rate from the NASDAQ (about 3850 yen when converted to the Nikkei 225). On the other hand, the difference in the 200-day divergence from the NYDow is undervalued by 6.4 points in the medium to long term (about 2460 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 16.0. The Nikkei VI rose to 22.5 for the week. The US market is optimistic and the Japanese market is slightly pessimistic.
The Nikkei 225 is below the 9-day and 25-day lines. The short-term trend has a ‘red light’.
The Nikkei 225 is below the equilibrium cloud. The overall divergence is -3.9% and the divergence from the 200-day moving average is -0.5%. As these three factors are negative, a ‘red 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 in 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 ‘yellow 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 ¥157range.
This week, US markets will be focused on President Trump's inauguration and the impact of his Executive Order, as well as the release of earnings results from Netflix, P&G, J&J, GE, TI, Union Pacific, American Express and Verizon. As for economic indicators, the S&P Global PMI and the number of existing home sales will be released. Globally, the Eurozone, German, UK and Japanese PMIs, German ZEW business confidence and UK employment data will be of interest.
Last week, the Nikkei 225 fell below its expected range. The upside was below JPY 1,320 and the downside was below JPY 230.
This week, the Nikkei 225 is expected to move between the 25-day line (currently around JPY 39270) on the upside and Bollinger Band -2σ (currently around JPY 38260) on the downside.
The Nikkei 225 is likely to continue to be influenced by interest rate developments in Japan and the US this week, but it is likely to remain difficult to move significantly until the Bank of Japan's monetary policy announcement on 24 January.
