Outlook for the Nikkei average this week [28-November-2021]

 [Present state recognition of fundamental]

Last week in the U.S. markets, stock indices fell sharply due to new concerns about the global economic recovery following the confirmation of a new and vaccine-resistant variant of coronavirus in South Africa.

Weekly Volatility NY Dow: -1.97%, NASDAQ: -3.52%, S&P 500: -2.20%

 

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 0.93 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 22.5 and the Nikkei 225's expected PER of 13.8 or 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 0.93 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 15.8, or if the Nikkei 225 is about 32950 yen compared to the current price of the Nikkei 225. The Japanese market is undervalued by about 4200 yen in the medium to long term.

 

From a fundamental point of view, we can say that the Japanese market is unattractive for 3,550 yen.

Although the undervaluation has widened compared to last week, it is mainly due to the weakness of Japanese stocks and the decline in US long-term interest rates.

 

[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 hold above the cloud in the equilibrium chart.

②    As a result of the announcement of quarterly financial results, the forecasted ROE of Nikkei 225 stocks was 9.1%, the same level as three months ago. In addition, the profit growth rate was +34.7%, 0.5 percentage points worse than three months ago.

③    Long-term interest rates in the U.S. declined and the interest rate gap between the U.S. and Japan narrowed from 1.48 to 1.40, causing the dollar to move higher against the yen in the range of 115 yen to 113 yen. The dollar index rose +0.01% for the week.

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 third week of November was oversold, the fourth week of November was likely oversold, and this week is expected to be oversold. Last week, among the five points, ①, ③ and ⑤ were bearish. 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 8.3 points (about 2390 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 2.2 points (about 630 yen in terms of the Nikkei 225) undervalued in the medium to long term.

The Japanese market improved its weakness versus the NASDAQ and increased its weakness versus the NYDow. The main reason is the decline in long-term interest rates in the US.

 

The Nikkei 225 is in the cloud of the equilibrium table. The total divergence rate turned negative at -3.4% compared to last week. The divergence from the 200-day moving average turned negative at -0.7%, and since two factors are negative, the medium-term trend has turned yellow.

The Nikkei 225 is below the 25-day and 9-day lines. The short-term trend has turned red.

 

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

Nasdaq is above the 200-day but under the 25-day and the 9-day line, It is above the cloud on the equilibrium chart.

It is a "red 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 downtrend. The Japanese market is in a medium-term uptrend and 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 113 to 114 yen.

 

This week, all eyes will be on the US jobs report to be released on Friday, which will show a continued recovery in the labor market. In addition, Fed Chairman Jerome Powell will testify before Congress, and the highly anticipated OPEC+ meeting is expected to provide guidance on the OPEC union's crude oil production plan. Other important data releases include global manufacturing and services PMIs; third quarter GDP for Australia, India, Canada, Brazil, and Turkey; the Eurozone inflation report; and industrial output and retail sales for Japan.

 

Last week, the Nikkei 225 fell below the expected range. The upper price was about 100 yen above the assumed line and the lower price was about 340 yen below the assumed line. The expected range of the Nikkei 225 for this week is between the Bollinger Band -1σ (currently around 28950 yen) on the upside and the Bollinger Band -3σ (currently around 28180 yen) on the downside.

 

Last week's expected range dropped not one, but two levels. This week, the expected range of the Nikkei 225 is likely to drop another notch.