Outlook for the Nikkei average this week [19-December-2021]

 [Present state recognition of fundamental]

In the U.S. market last week, stock indices declined as major central banks around the world indicated their intention to proceed with the normalization of monetary policy one after another, which would make it harder for funds to flow into the stock market.

Weekly Volatility NY Dow: -1.68%, NASDAQ: -2.95%, S&P 500: -1.94

                                       

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 1.04 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 22.1 and the Nikkei 225's expected PER of 13.7 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 1.04 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 33270 yen compared to the current price of the Nikkei 225. The Japanese market is undervalued by about 4730 yen in the medium to long term.

 

From a fundamental perspective, the Japanese market is unattractive for 4730 yen.

Compared to last week, the undervaluation has widened. The main reason is the decline in long-term interest rates in the United States.

 

[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 negative. The daily footstep is above the 200-day line but in the clouds of the equilibrium chart. NASDAQ weekly trend was negative. The daily footstep is above the 200-day line but in 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 +34.6%, 0.2 percentage points worse than three months ago.

③    The U.S. dollar weakened against the Japanese yen in the range of 113 yen to 114 yen, although long-term interest rates in the U.S. declined and the interest rate gap between the U.S. and Japan narrowed from 1.44 to 1.36. The dollar index rose +0.70% 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 second week of December was oversold, the third week of December was likely oversold, and this week is expected to be oversold. Last week, of the five points, ①was 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 5.3 points (about 1510 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 910 yen in terms of the Nikkei 225) undervalued in the medium to long term.

During the week, the weakness in the Japanese market improved. This was due to increased volatility in the U.S. market on concerns about the outcome of monetary policy changes by major central banks.

The Nikkei 225 is below the cloud in the equilibrium table. The total divergence rate was -4.0%, narrowing the negative range compared to last week. The divergence from the 200-day moving average was -1.1%, 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 and 9-day lines. The short-term trend has a "red light".

 

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

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

It is a "red 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.

 

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 large-scale economic measures by the US 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 government bonds and ETFs of up to 12 trillion yen, there are also economic measures by the Japanese government. In addition, 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 have decided to reduce their bond purchases and are looking for a time to raise interest rates.

 

From a technical standpoint, the U.S. market is in a medium-term downtrend and a short-term downtrend. The Japanese market is in a medium-term downtrend and 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 113 to 114yen.

 

Market activity is expected to be lower this week as we enter the Christmas vacations. Major economic indicators include the US and UK GDP updates for the third quarter, US durable goods orders and personal income and spending, EU and UK consumer confidence indexes, and Japan's inflation rate. China's central bank is scheduled to decide on its monetary policy.

Last week, the Nikkei 225 remained within the expected range. The upper price was about 480 yen below the assumed line and the lower price was about 100 yen above the assumed line. The expected range of the Nikkei 225 for this week is the 25-day line (currently around 28840 yen) on the upside and the Bollinger Band -2σ (currently around 27470 yen) on the downside.

 

This week will be a test of whether or not the price will fall below the recent low of 27589 yen set on December 3.