Outlook for the Nikkei average this week [10-October-2021]

 [Present state recognition of fundamental]

In the U.S. market last week, stock indices rose as the U.S. Congress agreed to raise the debt ceiling until December and as concerns about inflation due to high energy prices eased.

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 0.85 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 21.5 and the Nikkei 225's expected PER of 13.8 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 0.85 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 15.6, or if the Nikkei 225 is about 31760 yen compared to the current price of the Nikkei 225. The Japanese market is undervalued by about 3710 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 but in the clouds of the equilibrium chart. NASDAQ weekly trend was positive. The daily footstep is above the 200-day line but under the clouds of the equilibrium chart. It will be interesting to see if NYDow can get back above the cloud on the equilibrium chart.

②    As a result of the announcement of the quarterly financial results, the expected ROE of the Nikkei 225 stocks was 9.2%, an improvement of 0.3 points from three months ago. In addition, the profit growth rate was +33.9%, an improvement of 5.2% points from three months ago.

③    Long-term interest rates in the U.S. rose, widening the interest rate gap between Japan and the U.S. from 1.43 to 1.53, and the dollar moved in the direction of a weaker yen in the range of 110 yen to 112 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    The 5th week of September was oversold, the 1st week of October was likely oversold, and this week is expected to be oversold. Last week, of the five points, ① and ③ were bullish. This week, ①②③⑤ are expected to have an impact.

 

[Technical viewpoint]

Looking at the Japanese market from a technical standpoint, it is undervalued in the medium to long term by 6.1 points (about 1710 yen in terms of the Nikkei 225) in terms of the 200-day deviation from the NASDAQ. On the other hand, the 200-day divergence from NYDOW is 5.9 points (about 1650 yen in terms of the Nikkei 225) undervalued in the medium to long term.

 

The Nikkei 225 is in the cloud in the equilibrium table. The overall divergence rate was -8.9%, expanding negative range compared to last week. The divergence from the 200-day moving average was -2.3%, turning negative range.

Since tow factors are negative, the medium-term trend is "yellow light".

The Nikkei 225 is under the 9-day and 25-day lines. The "red light" has been given for the short-term trend.

 

In the U.S. market, NYDow is above the 200-day and the 25-day and the 9-day line, and in the equilibrium cloud.

Nasdaq is above the 200-day and the 9-day lines but under the 25-day line, and under the cloud within the equilibrium cloud.

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

 

[Outlook for this week]

Looking at the U.S. market from a fundamental perspective, concerns about a slowdown in the global economy due to the spread of the new coronavirus, the lack of creditworthiness of banks in the EU and the political situation, the trade friction between the U.S. and China, and problems in North Korea have receded, but risk factors include interest rate hikes in the U.S., rising long-term interest rates, rising oil prices, turmoil in financial markets due to the bursting of the real estate bubble and credit crunch in China, and geopolitical risks in the Middle East and East Asia.

 

Although the latest LIBOR rates are on a downward trend, continued 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 US zero interest rate policy and the Fed's direct financial support to corporations including bond purchases and $2 trillion in economic stimulus. In addition to the Bank of Japan's monetary easing measures, including the setting of a 2% inflation target, the introduction of 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 deepening of negative interest rates and continuation of quantitative easing. In addition to the measures taken by the Japanese government, there are also economic measures beyond those taken during the Lehman Shock, the establishment of the 92 trillion yen Corona Recovery Fund by the EU, and the deepening of negative interest rates and continuation of quantitative easing by the ECB. However, the ECB has decided to reduce its bond purchases.

 

From a technical standpoint, the U.S. market is in a medium-term no trend, and the short-term is no trend. The Japanese market is in a medium-term no trend and the short-term trend is 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 111 to 113 yen.

 

This week, as crude oil prices continue to soar, the U.S. Consumer Price Index for September will be released, which is expected to heighten caution about inflation. In addition, corporate earnings for the July-September period have begun, and corporate earnings will also be in focus. Other important data include the FOMC minutes, retail sales for September, and the New York Fed business index for October.

 

Last week, the Nikkei 225 was below the expected range. The upper price was about 500 yen below the assumed line and the lower price was about 420 yen below the assumed line. The expected range of the Nikkei 225 for this week is an upward move to the 25-day line (currently around 29510 yen) and a downward move to the Bollinger Band -2σ (currently around 27580 yen).