Outlook for the Nikkei average this week [20-Jun-2021]

 [Present state recognition of fundamental]

Equity indices fell in the US last week as speculation intensified that the Fed would bring forward the start of interest rate rises.

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 2.30 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 22.5 and the Nikkei 225's expected PER of 14.2 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 2.39 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 21.5, or if the Nikkei 225 is about 43820 yen compared to the current price of the Nikkei 225. The Japanese market is undervalued by about 14870 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 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 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 8.7%, an improvement of 3.0 points from three months ago. In addition, the profit growth rate was +27.2%, an improvement of 21.8% points from three months ago.

③    Although long-term interest rates in the United States declined and the interest rate gap between Japan and the United States narrowed from 1.43 to 1.40, the yen weakened from the 109 yen level to the 110 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 June was oversold, the third week of June was likely oversold, and this week is expected to be oversold. Last week, of the five points, ① was bearish. This week, ①②③⑤ are expected to have an impact.

 

[Technical viewpoint]

Looking at the Japanese market from a technical perspective, it is undervalued by 2.4 points (about 700 yen in terms of the Nikkei 225) over the medium to long term in terms of the 200-day deviation from the NASDAQ. On the other hand, it is undervalued by 0.1 points (about 30 yen in terms of the Nikkei 225) of the 200-day divergence from NYDow.

 

The Nikkei 225 is above the clouds in the Ichimoku Kinko table. The total deviation rate was +7.0%, which has been reduced positive width compared to last week. The 200-day moving average deviation rate was +6.8 which has been reduced positive width. As the two factors are positive, the "green light" is lit in the medium term trend.

The Nikkei 225 is above the 25 day line but under 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 but under the 25 day line and the 9 day line. It is in the clouds in the Ichimoku Kinko table. Nasdaq is above the 200 day line and the 25 day line but under the 9 day line. It is above 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]

On a fundamental basis, the US market has seen a decline in concerns about the US-China trade conflict and North Korea, but risks include US interest rate hikes, rising long-term interest rates, rising oil prices, falling high-yield bond markets, financial market turmoil due to the credit crunch, EU bank credit shortages and the political situation, fears of a global economic slowdown due to trade wars, and geopolitical risks in the Middle East and East Asia.

 

The most recent LIBOR rates are showing signs of rising, and caution is advised. 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 upward 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 10 weeks. However, it has been struggling for the past seven weeks. We expect the yen to be in the ¥109 to ¥110 range this week.

 

Preliminary PMI figures for the US, UK, Eurozone, Japan and Australia, due this week, will provide the first indication of the state of the global economy in June, with investors looking for signs of a sustained surge in price pressures. In addition, central banks in the UK and China are due to decide on their monetary policies. Other important releases include US Q1 GDP finalisation, durable goods orders, PCE data, UK and EU consumer morale, and retail sales in Canada and Australia.

 

Last week, the Nikkei 225 remained within the expected range. The upside was about 90 yen below the expected line and the downside was about 140 yen above the expected line. The expected range for the Nikkei 225 this week is between the 25-day line (currently around JPY28770) on the upside and the Bollinger Band -2σ (currently around JPY27980) on the downside.