Outlook for the Nikkei average this week [4-October-2020]

 [Present state recognition of fundamental]

In the US market last week, stock indexes rose as tech stocks continued to rebound. 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 1.53 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 24.8 and the expected P/E of 23.8 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 1.53% 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 17.4 or if the Nikkei 225 is around 16880 yen, the Japanese market is overvalued by 6160 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 in the clouds of the Ichimoku kinko table. NASDAQ weekly trend was positive. The daily footstep is above the 200-day line and in the clouds of the Ichimoku kinko table. It will be interesting to see if NYDow can return to the top of 25-day line.

②    As a result of the announcement of the quarterly financial results, the forecasted ROE of the Nikkei 225 stocks was 4.6%. 1.4 points worse than 3 months ago. Profit growth was -19.9%.16.6 points worse than 3 months ago.

③    The long-term interest rate in the United States rose, and the interest rate differential between Japan and the United States widened from 0.65% to 0.69%, but the exchange rate was in the 105-104 yen range, which was slightly 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    September 3rd was over selling. It is highly possible that September 4th 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 10.6 points (about 2440 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 0.9 points cheaper in the medium to long term (about 210 yen when considering the Nikkei average).

 

The Nikkei 225 is above the clouds in the Ichimoku Kinko Hyo. The total deviation rate was +4.6%, which shrank positive width compared to last week. The 200-day moving average deviation rate was +4.6%, which shrank positive width. As the three factors are positive, the "green light" is lit in the medium term trend.

The Nikkei 225 is under the 25th line and the 9th line. The "red light" is lit in short-term trends.

 

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

In the short term, the "yellow light" is lit, and in the medium term, the "yellow 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 no trend in the medium term　and no trend in the short term. The Japanese market is upward trend in the medium term and down trend in the short term.

 

An analysis of the foreign exchange market last week showed that the US long-term interest rate rose and the US-Japan long-term interest rate differential widened, but the yen appreciated. 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.

 

Minutes from the Fed and ECB will be in the spotlight this week, while the RBA will be deciding on monetary policy. Investors will also keep an eye on developments surrounding US presidential election as Pence and Harris face off in the Vice Presidential debate and President Trump remains in quarantine after testing positive for COVID-19. On the economic data front, important releases include US ISM Non-Manufacturing PMI and foreign trade.

 

Last week's Nikkei average was below the expected range. The upper price matched the assumed line, but the lower price was about 140 yen below the assumed line. The expected range of this week's Nikkei average is that the upper price is on the 25th line (currently around 23270 yen) and the lower price is between Bollinger Bands-3σ (currently around 22750 yen).