Outlook for the Nikkei average this week [14-November-2021]

 [Present state recognition of fundamental]

In the U.S. market last week, stock indices fell on concerns that the consumer price index rose faster than market expectations and that the timing of interest rate hikes would be accelerated.

Weekly change NY Dow: -0.63%, NASDAQ: -0.69%, S&P 500: -0.31

 

On the other hand, in the medium to long term, there are concerns about accelerating inflation due to rising energy costs, production and supply costs, as well as concerns about the bursting of the real estate bubble and economic slowdown in China. There are also concerns about a slowdown in the global economy due to supply chain disruptions. Therefore, there are also concerns about the arrival of stagflation. Furthermore, we need to continue to pay attention to geopolitical risks in East Asia, the Middle East, and Ukraine.

 

The difference in the yield spread between the Japanese and U.S. markets is that the Japanese market is 0.66 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 22.4 and the Nikkei 225's expected PER of 14.5 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 0.66 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 16.0, or if the Nikkei 225 is about 32720 yen compared to the current price of the Nikkei 225. The Japanese market is undervalued by about 3110 yen in the medium to long term.

 

From a fundamental point of view, it can be said that the Japanese market is unattractive for 3,110 yen.

Compared to last week, the undervaluation has decreased, but this is mainly due to the decrease in EPS of the Nikkei 225.

 

[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 equilibrium chart. NASDAQ weekly trend was negative. The daily footstep is above the 200-day line and the clouds of the equilibrium chart. It will be interesting to see if NYDow can make a new high or not.

②    As a result of the announcement of quarterly financial results, the forecasted ROE of Nikkei 225 stocks was 9.0%, 0.1 percentage points worse than three months ago. In addition, the profit growth rate was +32.5%, 2.7 percentage points worse than 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 1.40 to 1.49, and the dollar moved in the direction of yen depreciation in the range of 112 yen to 114 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 fourth week of October was oversold, the first week of November was likely oversold, and this week is expected to be overbought. Last week, of the five points, ① and ② were bullish. 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 8.4 points (about 2490 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 3.2 points (about 950 yen in terms of the Nikkei 225) undervalued in the medium to long term.

This led to an improvement in the weakness of the Japanese market. Rising U.S. long-term interest rates and falling tech stocks were the main factors.

 

The Nikkei 225 is above the cloud in the equilibrium table. The total divergence rate was +7.5%, a smaller positive margin compared to last week. The divergence from the 200-day moving average was +2.0%, and the positive range narrowed.

Since 3 factors are positive, the medium-term trend is "green light".

The Nikkei 225 is above the 9-day line, and the 25-day line. The green light is on for the short-term trend.

 

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

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

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 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 zero interest rate policy in the U.S. and direct financial support to corporations by the Fed, including bond purchases, as well as large-scale economic measures by the government. 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. However, the ECB and the Fed are not in the same boat. However, the ECB and the Fed have decided to reduce their bond purchases and are searching for a time to raise interest rates.

 

From a technical standpoint, the U.S. market is in a medium-term uptrend and a short-term no trend. Japanese markets are uptrend in the medium term and uptrend 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 113 to 114 yen.

 

US industrial production, retail sales and earnings from big retailers will be in the spotlight this week and investors will also follow speeches from several Fed officials for any clues on the Fed's next steps. China will provide an update on the economic recovery via industrial production and retail sales and a first release of Japan's GDP for Q3 is also due. In Europe, all eyes will be on the UK labour market report, inflation and retail sales release.

 

Last week, the Nikkei 225 fell below the assumed range. The upper price was about 780 yen below the assumed line and the lower price was about 430 yen below the assumed line. The expected range for the Nikkei 225 this week is between the Bollinger Band +3σ (currently around 30440 yen) on the upside and the Bollinger Band +1σ (currently around 29490 yen) on the downside.