Outlook for the Nikkei average this week [16-August-2020]

[Present state recognition of fundamental]

In the US market last week, the stock market index rose due to expectations for the commercialization of a new coronavirus vaccine. On the other hand, in the medium to long term, the spread of new types of pneumonia, an inward political situation centered on the world's own country, a lack of creditworthiness and credit crunch of banks, a slowdown in China and other economies, a fear of a slowdown in the global economy due to trade wars, etc. The geopolitical risks of the Middle East, the Korean Peninsula and Ukraine need continued attention.

The difference in the yield spread between the Japanese and U.S. markets is the published OECD real GDP forecast for 2021 The Japanese market is overvalued by 0.60 points, considering the announced OECD real GDP forecast for 2021. The reason for the overvaluation is the difference between the P/E of the S&P500 at 29.0 and the expected P/E of 21.8 of the Nikkei 225 stocks for the current fiscal year, as well as the difference between Japanese and U.S. interest rates and GDP growth.

This means that if the difference in the GDP growth rate between Japan and the U.S. in 2021 is further decrease by 0.60% compared to the OECD forecast (Japan is revised downward or the U.S. is revised upward), or if the PER of the Nikkei 225 stocks for the current term is around 19.3 or if the Nikkei 225 is around 20600 yen, the Japanese market is overvalued by 2690 yen in the medium to long term , which is roughly balanced.

[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 UP of expected profit increase rate for the current term more than before

③ Expansion of the interest rate differential between Japan and the US and further depreciation of the yen

④ Upward revision of Japan's 2021 GDP estimate (now -0.5%) by OECD

⑤ Foreign investors over-buying

Looking at recent movements

①    Last week's NYDow weekly trend was positive. The daily footstep is above the 200-day line and above the clouds of the Ichimoku kinko table, while the weekly NASDAQ weekly trend was positive. The daily footstep is above the 200-day line and above the clouds of the Ichimoku kinko table. This week, all eyes will be on the housing index, New York Fed Index for August, Philadelphia Fed Index for August. It will be interesting to see if NYDow can keep above the 25-day line.

②    As a result of the announcement of the quarterly financial results, the forecasted ROE of the Nikkei 225 stocks was 5.0%. 1.6 points worse than 3 months ago. Profit growth was -17.6%, an improvement of 37.7 percentage points compared to three months ago.

③    The long-term interest rate in the United States has risen, the interest rate differential between Japan and the United States has expanded from 0.56% to 0.67%, and the yen has depreciated at 105 to 107 units..

④    The OECD's real GDP growth forecasts for Japan and the U.S. for 2021 were released, and Japan's GDP growth rate is expected to be -.0.5%. The U.S. market is expected to be up 1.9%, which means that the Japanese market is 2.4 points worse off in this respect.  

⑤    The 1st week of August was a over buying. There was a high possibility that the 2nd week of August was over buying, and this week we are forecasting to over buying.

Last week, ① and ③ were bullish factor. It seems that ①,②,③,⑤ will be affected this week.

[Technical viewpoint]

From a technical perspective on the Japanese market, the difference in the 200-day deviation rate from NASDAQ is 14.2 points (about 3310 yen when considering the Nikkei 225 average) over the medium to long term. The price range shrank compared to last week. On the other hand, the difference in the 200-day deviation rate from NYDow is 0.5 points (about 120 yen when considering the Nikkei 225 average) under the medium to long term.

The Nikkei 225 is above the clouds in the Ichimoku Kinko Hyo. The total deviation rate was +15.3%, which expanded positive width compared to last week. The 200-day moving average deviation rate was +5.9%, which expanded positive width. As the three factors are positive, the "green light" is lit in the medium term trend.

The Nikkei 225 is above the 25th and 9th lines. The "green light" is lit in short-term trends.

In the US market, NY Dow is above the 200 and 25 day lines and the 9 day line. It is above the clouds in the Ichimoku Kinko table. Nasdaq is above the 200 and 25 day lines, and the 9 day line. It is above the clouds of the Ichimoku Kinko table.

In the short term, the "green light" is lit, and in the medium term, the "green light" is lit.

[Outlook for this week]

Looking at the US market fundamentally, concerns such as interest rate hikes in the United States, US-China trade friction, US political uncertainty, North Korea issues are receding However, Spread of pneumonia infection by new coronavirus, falling crude oil prices, worsening U.S. corporate earnings, falling high yield bond markets , global long-term interest rate decline trend, financial market turmoil caused by credit slumps, lack of creditworthiness and political situation of EU banks, global economic slowdown concern with trade war, geopolitical risk of the Middle East and Ukraine Etc exist as a risk factor.

Real estate prices in China are flat in large cities, but the problems of nonperforming loans in China as a whole such as excessive facilities have not been resolved. If you hurry up the process, it will lead to a short-term market drop, and if you delay proceeding, there is concern that the economic recession will be prolonged.

In addition, although the LIBOR interest rate has recently been declining, in March, the LIBOR interest rate has risen despite a decline in short-term interest rates, so there is a concern that financial instability may recur.

On the other hand, good news is the US zero interest rate policy, the Fed's direct financial support to companies including the purchase of junk bonds, economic measures of $ 2 trillion, and President Trump's policy expectations, monetary easing measures such as the Bank of Japan's 2% inflation target, the introduction of negative interest rates and the purchase of unlimited Japanese government bonds and 12 trillion yen in ETFs, as well as expectations for economic measures by the Japanese government that exceed the level of the Lehman Shock, large-scale economic measures by the EU countries, and the ECB's announcement of deepening negative interest rates and expanding quantitative easing.

Looking at the technical aspect, the US market is upward trend in the medium term　and upward trend in the short term. The Japanese market is upward trend in the medium term and upward trend in the short term.

Analyzing the foreign exchange market last week, long-term interest rates in the US rose, the long-term interest rate differential between Japan and the US widened, and the yen moved toward a weaker yen. This week, we expect prices in the 106 to 107 yen range.

From now on, we need to pay attention to technical indicators, US market trends, exchange rate movements, and foreign investor trends.

This week, the minutes of the Fed and ECB will be highlighted. The central bank of China will also decide on monetary policy. In terms of economic data, PMI surveys in the US, UK, Eurozone, Japan, and Australia provide insights on whether these economies continued to recover in the wake of the COVID-19 infection. Other key data include US housing data, UK retail trade and inflation, Japan second quarter GDP, trade balance and inflation.

Last week's Nikkei average was above the expected range. The upper price exceeded the assumed line by about 310 yen, and the lower price exceeded the assumed line by about 470 yen. The expected range for the Nikkei 225 this week is to move between an upper price of Bollinger band +3σ (currently around 23580 yen) and a lower price of Bollinger band +1σ (currently around 22940 yen).