Outlook for the Nikkei average this week [12-December-2021]

 [Present state recognition of fundamental]

Last week in the U.S. markets, stock indices rose as concerns about the impact of Omicron Covid-19 variant eased and the large increase in the November CPI was perceived as largely within expectations.

Weekly Volatility NY Dow: +4.02%, NASAQ: +3.61%, S&P 500: +3.82

 

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 1.17 points cheaper than the U.S. market, considering the announced OECD nominal GDP forecast for 2023. The reason for the undervaluation is the difference between the S&P 500's PER of 22.2 and the Nikkei 225's expected PER of 13.6 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 1.17 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 16.2, or if the Nikkei 225 is about 33810 yen compared to the current price of the Nikkei 225. The Japanese market is undervalued by about 5370 yen in the medium to long term.

 

From a fundamental perspective, the Japanese market is unattractive for 5370 yen.

Compared to last week, the undervaluation has widened. This is mainly due to the rise in long-term interest rates in the US and weakness in the Japanese market.

 

[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 2023 GDP estimate (now +1.8%) 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 and the clouds of the equilibrium chart. NASDAQ weekly trend was positive. 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 200-day moving average line.

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%, 0.6 percentage points worse than three months ago.

③    Long-term interest rates in the U.S. rose and the interest rate gap between Japan and the U.S. widened from 1.30 to 1.44, causing the dollar to weaken against the yen in the range of 112 yen to 113 yen. The dollar index fell -0.02% for the week.

④    The OECD's nominal GDP growth forecast for Japan and the U.S. for 2023 has been released, and Japan is expected to grow by +1.8% and the U.S. by +4.9%, so the Japanese market is 3.1 percentage points inferior in this aspect.

⑤    The first week of December was oversold, the second week of December was likely oversold, and this week is expected to be oversold. Last week, of the five points, ①was bullish and ⑤ was 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 9.4 points (about 2670 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 5.7 points (about 1620 yen in terms of the Nikkei 225) undervalued in the medium to long term.

In the past week, the weakness in the Japanese market has increased. Concerns about the U.S. moving up the timing of its interest rate hike seem to have created a selling trend in the Japanese market and a buying trend in the U.S. market.

 

The Nikkei 225 is below the cloud in the equilibrium table. The total divergence rate was -5.5%, narrowing the negative range compared to last week. The divergence from the 200-day moving average was -1.6%, narrowing the negative range. Since all three factors are negative, the medium-term trend has a "red light".

The Nikkei 225 is below the 25-day but above 9-day lines. The short-term trend has turned yellow.

 

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

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

 

Recent LIBOR rates have been on an upward trend and require continued attention. 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. The Japanese market is in a medium-term downtrend and a short-term no trend.

 

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 1134yen.

 

The US Fed, ECB, BOE and BOJ will be meeting to discuss monetary policy this week, with investors eager to hear if policymakers will be updating forward guidance amid concerns over the Omicron variant and mounting inflationary pressure. December flash PMIs for the US, UK, Eurozone, Japan and Australia will give an insight about the state of the global economy, while other releases include US and China retail sales and industrial output, UK inflation and labor market data, Eurozone industrial production, and Japan's Q4 Tankan survey.

 

Last week, the Nikkei 225 was above the assumed range. The upper price was about 580 yen above the assumed line and the lower price was about 700 yen above the assumed line. The assumed range of the Nikkei 225 for this week is that the upside will be at the Bollinger Band +1σ (currently around JPY29680) and the downside will be between the Bollinger Band -1σ (currently around JPY28280).

 

This week will be a test of whether or not the market can exceed the 29,000 yen area, where the 25-day (28980 yen) and 200-day (28890 yen) lines of interest gather.