Outlook for the Nikkei average this week [21-March-2021]

 

[Present state recognition of fundamental]

In the U.S. market last week, long-term interest rates continued to rise, and stock indices fell.. On the other hand, in the medium to long term, there are concerns about inflation due to the side effects of excess liquidity, and concerns about a shortage of bank credit and a credit crunch due to defaults on high-yield bonds. There are also concerns about a slowdown in the global economy due to the economic slowdown in China and other countries, trade wars, etc., given the global political situation centered on the home country. Furthermore, we need to continue to pay attention to geopolitical risks in the Middle East and East Asia.

 

The difference in the yield spread between the Japanese and U.S. markets is 0.13 points higher than that of the U.S. market, considering the announced OECD nominal GDP forecast for 2021. The reason for the premium is the difference between the S&P 500's P/E ratio of 22.4 and the Nikkei 225's expected P/E ratio of 23.0 for the current fiscal year, as well as the difference in interest rates and GDP growth between the U.S. and Japan.

This means that if the difference in GDP growth rates between Japan and the U.S. in 2021 is further reduced by 0.13 percentage points compared to the OECD forecast (upwardly revised for Japan or downwardly revised for the U.S.), or if the P/E ratio of the Nikkei 225 stocks for the current fiscal year is about 22.4, or if the Nikkei 225 is about 28940 yen compared to the current price of the Nikkei 225 The Japanese market is overvalued by about 860 yen in the medium to long term.

 

[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 +2.72%) by OECD

⑤ Foreign investors over-buying

 

Looking at recent movements

①    Last week's NYDow weekly trend was negative. The daily footstep is above the 200-day line and the clouds of the Ichimoku kinko table. NASDAQ weekly trend was negative. 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 keep above the 25-day line.

②    As a result of the announcement of the quarterly financial results, the expected ROE of the Nikkei 225 stocks was 5.8%, an improvement of 1.1 points from three months ago. In addition, the profit growth rate was +5.4%, an improvement of 25.6% points from three months ago.

③    Although long-term interest rates in the U.S. rose and the interest rate gap between Japan and the U.S. widened from 1.51% to 1.62%, the exchange rate moved in the direction of yen appreciation from the 109-yen to 108-yen range..

④    The OECD's nominal GDP growth forecast for Japan and the U.S. for 2021 has been revised, and Japan is expected to be +2.72% and the U.S. +4.35%, so the Japanese market is 1.63 percentage points inferior in this aspect.

⑤    It is highly likely that the March 2 week was overbought and the March 3 week oversold, and this week is expected to be overbought. Last week, of the five points, ① and ③ were bearish. This week, ①②③⑤ are expected to have an impact.

 

[Technical viewpoint]

From a technical standpoint, the Japanese market is overvalued by 7.3 points over the medium to long term in terms of the 200-day deviation from the NASDAQ (about 2170 yen in terms of the Nikkei 225). Compared to last week, the overvalued range has increased. On the other hand, the 200-day divergence from NYDow is 5.5 points (about 1,640 yen to the Nikkei 225) overvalued in the medium to long term.

 

The Nikkei 225 is above the clouds in the Ichimoku Kinko table. The total deviation rate was +24.2%, which has shrank positive width compared to last week. The 200-day moving average deviation rate was +18.5 which has shrank in the 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 and the 9th line. The "green light" is lit in short-term trends.

 

In the US market, NY Dow is above the 200 day line and the 25 day line but under the 9 day line. It is above the clouds in the Ichimoku Kinko table. Nasdaq is above the 200 day line but under the 25 day line and the 9 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 U.S. market from a fundamental perspective, concerns about the U.S. interest rate hike, the U.S.-China trade friction, and the North Korea issue have receded, but risk factors include the upward trend in long-term interest rates, rising oil prices, falling high yield bond markets, financial market turmoil due to the credit crunch, lack of creditworthiness of banks in the EU and the political situation, concerns about a global economic slowdown due to trade wars, and geopolitical risks in the Middle East and East Asia.

 

The latest LIBOR rates are calm and there is no sign of financial instability. In March 2020, the LIBOR rate rose despite a decline in short-term interest rates, raising awareness of the possibility of renewed financial instability.

 

On the other hand, favorable factors include the zero interest rate policy in the U.S. and the Fed's direct financial support to corporations including junk bond purchases and $2 trillion in economic stimulus measures. In addition to the Bank of Japan's monetary easing measures such as setting a 2% inflation target, introducing negative interest rates and unlimited purchases of JGBs and 6 trillion yen in ETFs, the Japanese government's economic stimulus measures exceeding those taken during the Lehman Shock, the EU's establishment of a 92 trillion yen Corona Recovery Fund, and the ECB's announcement of deepening negative interest rates and expanding quantitative easing. These are just a few examples.

 

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 upward trend in the short term.

 

Analyzing the foreign exchange market, the yen had been moving gently in the direction of appreciation for the past year, but in the past two months, it has been rapidly reversing the direction of depreciation. This week, we expect the yen to be in the 108 to 109 range.

 

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

 

This week, flash PMI surveys for the US, UK, Eurozone, Japan and Australia will give an insight about the state of the global economic recovery, while central banks in China will be deciding on monetary policy. Other important releases to follow include US final Q4 GDP, durable goods orders, and personal income and outlays; UK unemployment, retail trade and inflation data; and Eurozone and South Korea consumer morale.

 

Last week, the Nikkei 225 was mostly within the expected range. The upper price was about 160 yen below the assumed line and the lower price was about 30 yen below the assumed line. The expected range for the Nikkei 225 this week is between the Bollinger Band +1σ (currently around 30150 yen) on the upside and the Bollinger Band -1σ (currently around 29160 yen) on the downside.