Outlook for the Nikkei average this week [18-July-2021]

 [Present state recognition of fundamental]

In the U.S. market last week, stock indices declined as investor sentiment deteriorated due to caution about the reemergence of infection by the delta form of the new coronavirus.

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 0.90 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 22.6 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 0.90 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 15.5, or if the Nikkei 225 is about 31910 yen compared to the current price of the Nikkei 225. The Japanese market is undervalued by about 3910 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 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 2.9 points from three months ago. In addition, the profit growth rate was +28.8%, an improvement of 19.6% 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 1.34 to 1.28, and the exchange rate fluctuated between the 101 yen and 109 yen levels.

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    It is highly likely that the first week of July was overbought and the second week of July was oversold, and this week is expected to be oversold. Last week, of the five points, ①, ③ 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 8.0 points (about 2240 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 2130 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 was -4.3%, narrowing the negative range compared to last week, and the 200-day moving average divergence rate was +1.3%, narrowing the positive range. 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 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 above clouds of the Ichimoku Kinko table.

In the short term, the "yellow light" is lit, and in the medium term, the "green light" is lit.

 

[Outlook for this week]

Looking at the U.S. market from a fundamental point of view, concerns about U.S. interest rate hikes, rising long-term interest rates, rising crude oil prices, U.S.-China trade frictions, and problems in North Korea have receded, but risk factors include declines in the high-yield bond market, 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 the spread of the new coronavirus, 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 no trend in the short term. The Japanese market is no trend in the medium term and downward trend in the short term.

 

An analysis of the currency markets shows that the yen was moving gently higher in 2020, but has reversed course to weaker in 2021. This week, we expect the yen to be in the range of 109 to 110 yen.

 

The second quarter earnings season continues this week, with companies such as IBM, Netflix, Intel, J&J, and Twitter announcing their results. In addition, preliminary PMI data from the U.S., U.K., Eurozone, and Australia will be closely watched, while central banks in the Eurozone and China will make monetary policy decisions. Other important data include building permits and housing starts in the U.S., retail sales in the U.K. and Canada, consumer confidence in the Eurozone, and trade balance and inflation in Japan.

 

Last week, the Nikkei 225 was mostly within the expected range. The upside was about 70 yen above the assumed line and the downside was about 70 yen below the assumed line. The expected range of the Nikkei 225 for this week is between the Bollinger Band -1σ (currently around 28310 yen) on the upside and the Bollinger Band -3σ (currently around 27520 yen) on the downside.