Outlook for the Nikkei average this week [23-May-2021]

 [Present state recognition of fundamental]

Last week, the U.S. market was affected by the volatility of the virtual currency Bitcoin, and stock indices showed mixed movements. On the other hand, in the medium to long term, there are concerns about inflation due to side effects of excess liquidity, and concerns about lack of creditworthiness of banks and credit crunch due to defaults by funds and other institutions. There are also concerns about the collapse of China's real estate bubble and economic slowdown, as well as concerns about a global economic slowdown due to trade wars and other factors. Furthermore, geopolitical risks in East Asia, the Middle East, and Ukraine continue to require attention.

 

The difference in the yield spread between the Japanese and U.S. markets is that the Japanese market is 2.59 points cheaper than the U.S. market, considering the announced OECD nominal GDP forecast for 2021. The reason for the undervaluation is the difference between the S&P 500's PER of 22.4 and the Nikkei 225's expected PER of 14.0 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 GDP growth rate difference between Japan and the U.S. in 2021 expands by another 2.28 percentage points 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 fiscal year is about 22.0, or if the Nikkei 225 is about 44,460 yen compared to the current price of the Nikkei 225. The Japanese market is undervalued by about 16140 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 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 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 8.8%, an improvement of 2.8 points from three months ago. In addition, the profit growth rate was +26.9%, an improvement of 21.7% points from three months ago.

③    Although long-term interest rates in the U.S. declined, the interest rate difference between Japan and the U.S. remained unchanged at 1.55 to 1.55, and the exchange rate moved in the direction of yen appreciation from the 109 yen level to the 108 yen level.

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    The second week of May was oversold, the third week of May was likely oversold, and this week is expected to be overbought. Last week, of the five points, ① was bullish. This week, ①②③⑤ are expected to have an impact.

 

[Technical viewpoint]

Looking at the Japanese market from a technical standpoint, the 200-day divergence from the NASDAQ is 0.0 points (about 0 yen in terms of the Nikkei 225) over the medium to long term, and the market is in balance. On the other hand, it is undervalued by 5.1 points (about 1,440 yen in terms of the Nikkei 225) over the medium to long term in terms of the 200-day divergence from NYDow.

 

The Nikkei 225 is under the clouds in the Ichimoku Kinko table. The total deviation rate was +1.9%, which has changed positive width compared to last week. The 200-day moving average deviation rate was +6.9 which has expanded positive width. As the two factors are positive, the "yellow light" is lit in the medium term trend.

The Nikkei 225 is under the 25 day line but above the 9 day 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 but under the 25 day line and above 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. 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 ETFs ranging from 0 to 12 trillion yen, the Japanese government's economic 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.

 

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 no trend in the medium term and no trend in the short term.

 

Analysis of the currency markets shows that the yen was moving gently higher in 2020, but has rapidly weakened since the start of 2021, but has been struggling for the past 6 weeks. However, it has been struggling for the past five weeks. We expect the yen to be in the ¥108 to ¥109 range this week.

 

This week in the U.S., in addition to the revised first quarter GDP, durable goods orders, personal income and spending, and PCE price index will be released, and President Biden's proposed budget for 2022 will also be in focus. In addition, the central banks of South Korea, Indonesia, and New Zealand will make monetary policy decisions, and GDP releases are scheduled for Germany and France. The Eurozone Business Confidence Survey, China's industrial profits, and Japan's unemployment rate will also be closely watched.

 

Last week, the Nikkei 225 temporarily fell below the assumed range. The upper price was about 1,100 yen below the assumed line and the lower price was about 170 yen below the assumed line. The expected range of the Nikkei 225 for this week is between the Bollinger Band +1σ (currently around 29510 yen) on the upside and the Bollinger Band -1σ (currently around 28200 yen) on the downside.