Outlook for the Nikkei average this week [11-July-2021]

 [Present state recognition of fundamental]

Stock indices fluctuated wildly in the U.S. market last week as the spread of the new coronavirus failed to abate, raising fears that the economic recovery could be delayed.

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 1.03 points cheaper than the U.S. market, considering the announced OECD nominal GDP forecast for 2022. The reason for the undervaluation is the difference between the S&P 500's PER of 22.7 and the Nikkei 225's expected PER of 13.6 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 1.03 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 15.7, or if the Nikkei 225 is about 32460 yen compared to the current price of the Nikkei 225. The Japanese market is undervalued by about 4520 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 positive. 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 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 8.9%, an improvement of 3.0 points from three months ago. In addition, the profit growth rate was +28.8%, an improvement of 23.4% points from three months ago.

③    Long-term interest rates in the U.S. declined, and the interest rate gap between Japan and the U.S. narrowed from 1.39 to 1.34, and the yen moved in the direction of appreciation from the 111 yen level to the 109 yen level.

④    The OECD's nominal GDP growth forecast for Japan and the U.S. for 2022 has been revised, and Japan is expected to be +2.72% and the U.S. +6.01%, so the Japanese market is 3.29 percentage points inferior in this aspect.

⑤    The fifth week of June was oversold, the first week of July was likely oversold, and this week is expected to be overbought. Last week, of the five points, ③and ⑤ were 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 10.6 points (about 2960 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 8.6 points (about 2400 yen in terms of the Nikkei 225) of the 200-day divergence from NYDow.

 

The Nikkei 225 is below the cloud in the equilibrium table. The total divergence rate turned negative at -4.9% compared to last week, and the divergence rate from the 200-day moving average narrowed to +1.5%. 2 factors are negative, so the medium-term trend is "yellow light".

 

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 above 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]

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 rate has shown signs of rising, and caution is required; even 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 upward trend in the medium term　and upward trend in the short term. The Japanese market is no trend in the medium term and downward trend in the short term.

 

If we analyse the currency markets, we can see that the yen has been moving gently higher in 2020, but will weaken in 2021. This week, we expect the yen to be in the \110 to \111 range.

 

This week marks the start of the U.S. earnings season and several major U.S. banks will release their second quarter results. Investors will also focus on Fed Chairman Jerome Powell's semi-annual report to Congress. On the data front, consumer and producer inflation, retail sales, and industrial production will provide updates on the economic recovery. Other noteworthy events include China's second quarter GDP growth, the UK's consumer price index and unemployment rate, and the Bank of Japan's interest rate decision.

 

Last week, the Nikkei 225 fell below the assumed range. The upper price was about 420 yen below the assumed line and the lower price was about 1030 yen below the assumed line. The expected range of the Nikkei 225 for this week is that the upside will be at the 25-day line (currently around 28810 yen) and the downside will be between the Bollinger Band -2σ (currently around 28090 yen).