Outlook for the Nikkei average this week [18-October-2020]

 

[Present state recognition of fundamental]

In the US market last week, the stock index was uncertain due to expectations for additional economic agreements and a surge in infection with the new coronavirus. 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 1.12 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 25.9 and the expected P/E of 22.7 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 1.12% 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 18.1 or if the Nikkei 225 is around 18670 yen, the Japanese market is overvalued by 4740 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 flat. The daily footstep is above the 200-day line and above the clouds of the Ichimoku kinko table. NASDAQ weekly trend was flat. The daily footstep is above the 200-day line and above the clouds of the Ichimoku kinko table. It will be interesting to see if NYDow can be keeping 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 4.9%. 1.2 points worse than 3 months ago. Profit growth was -20.9%. 20.2 points worse than 3 months ago.

③    The long-term interest rate in the United States fell, the interest rate differential between Japan and the United States narrowed from 0.75% to 0.74%, and the exchange rate was in the 105 yen range, which was a little stronger.

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    October 1st was over buying. It is highly possible that October 2nd was over selling, and this week is expected to be over selling. Last week, ⑤ was bearish factor. This week, ①②③⑤ are expected to have an influence.

 

[Technical viewpoint]

Looking at the Japanese market from a technical point of view, the difference in the 200-day line deviation rate from NASDAQ is 13.5 points (about 3160 yen when considering the Nikkei average) cheaper in the medium to long term. Compared to last week, the bargain range has expanded. On the other hand, the difference in the 200-day line deviation rate from NYDow is 2.8 points cheaper in the medium to long term (about 660 yen when considering the Nikkei average).

 

The Nikkei 225 is above the clouds in the Ichimoku Kinko Hyo. The total deviation rate was +8.4%, which shrank positive width compared to last week. The 200-day moving average deviation rate was +6.3, which shrank 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 line but under the 9th line. The "yellow light" is lit in short-term trends.

 

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

 

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 $ 3 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, Established 92 trillion yen corona reconstruction fund by EU, 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 no trend in the short term.

 

An analysis of the foreign exchange market last week showed that long-term interest rates in the United States fell, the long-term interest rate differential between Japan and the United States narrowed, and the yen moved slightly stronger. This week, it is expected to be in the 105-104 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 will see the final US presidential debate between Trump and Biden, while the third-quarter earnings season continues, with companies such as IBM, Netflix and Tesla reporting their results. Elsewhere, flash PMI surveys for the US, UK, Eurozone, Japan and Australia will be keenly watched, while central banks in China, Russia and Turkey will be deciding on monetary policy. Other key data to follow include: US building permits and housing starts; UK inflation data and retail trade; Eurozone consumer confidence; China Q3 GDP figures; and Japan trade balance and inflation.

 

Last week's Nikkei average remained almost within the expected range. The upper price was about 240 yen below the assumed line, and the lower price almost matched the assumed line. This week's Nikkei 225 is expected to move between the Bollinger Bands + 1σ (currently around 23580 yen) and the Bollinger Bands-2σ (currently around 23040 yen).