Outlook for the Nikkei average this week [22-August-2021]

 [Present state recognition of fundamental]

Stock indices fell in the U.S. market last week on caution that the Fed's accelerated implementation of tapering could chill the economy.

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 1.35 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 22.0 and the Nikkei 225's expected PER of 12.6 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 1.35 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 15.2, or if the Nikkei 225 is about 32540 yen compared to the current price of the Nikkei 225. The Japanese market is undervalued by about 5520 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 9.1%, an improvement of 0.3 points from three months ago. In addition, the profit growth rate was +35.8%, an improvement of 8.9% points from three months ago.

③    Despite the decline in long-term interest rates in the U.S., the interest rate differential between Japan and the U.S. remained unchanged at 1.26 to 1.26 and faltered in the range of 110 yen to 109 yen.

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 second week of August was overbought and the third week of August was 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 12.1 points (about 3270 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 11.3 points (about 3050 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 -11.3%, widening the negative range compared to last week. The deviation from the 200-day moving average was -3.9%, and the negative spread widened. The Nikkei 225 is below the 9-day and 25-day lines. The short-term trend has turned red.

 

In the U.S. markets, NYDow is above the 200-day, 25-day average line but under the 9-day average line and above its equilibrium cloud. Nasdaq is above the 200-day, 9-day lines, but under the 25-day line and above the clouds in the equilibrium chart.

It is a "yellow light" in the short term and a "green light" in the medium term.

 

[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.

 

From a technical standpoint, the U.S. market is in a medium-term uptrend, while the short-term trend is faltering. The Japanese market is in a medium-term downtrend and is also in a short-term downtrend.

 

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 118 yen.

 

This week, the Fed and RBA will release the minutes of their policy meetings and China's central bank will hold its interest rate decision meeting. On the economic data front, important releases include retail sales and industrial production in the U.S. and China, inflation data and retail sales in the U.K., second quarter GDP updates in Japan and the Eurozone, and employment statistics in Australia.

 

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 440 yen below the assumed line. The expected range of the Nikkei 225 for this week is between the Bollinger Band -1σ (currently around 27400 yen) on the upside and the Bollinger Band -3σ (currently around 26730 yen) on the downside.