Outlook for the Nikkei average this week [02-January-2022]

 [Present state recognition of fundamental]

In the U.S. market last week, stock indices moved in a mixed manner as caution over the spread of the Omicron variant of the new coronavirus eased, while tech stocks were hit by profit-taking.

Weekly Volatility NY Dow: +1.08%, NASAQ: -0.05%, S&P 500: +0.85%

                                       

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 1.23 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 22.8 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 1.23 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 16.6, or if the Nikkei 225 is about 34650 yen compared to the current price of the Nikkei 225. The Japanese market is undervalued by about 5860 yen in the medium to long term.

 

From a fundamental point of view, the Japanese market is unattractive for 5860 yen.

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

 

[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 lineand 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. This week, I will focus on whether NYDow can hold above the 200-day line or not

②    As a result of the announcement of the quarterly financial results, the forecasted ROE of Nikkei 225 stocks was 9.1%, 0.1 points worse than three months ago. In addition, the profit growth rate was +34.8%, an improvement of 1.6 points from 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 1.43 to 1.45, causing the dollar to weaken against the yen in the range of 114 yen to 115 yen. The dollar index fell -0.41% 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 fourth week of December was oversold, the fifth week of December was likely oversold, and this week is expected to be oversold. Last week, of the five points, ③ was 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 6.7 points (about 1930 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 4.5 points (about 1300 yen in terms of the Nikkei 225) undervalued in the medium to long term.

During the week, the weakness of the Japanese market against the New York Dow increased. This is because foreign selling continued and the Japanese market was not as volatile as the US market.

The Nikkei 225 is below the cloud in the equilibrium table. The overall divergence rate was +0.1%, turning positive compared to last week. The divergence from the 200-day moving average was -0.1%, narrowing the negative range. Since the two factors are negative, the medium-term trend has a "yellow light".

The Nikkei 225 is above the 25-day and 9-day lines. The short-term trend has a "green light".

 

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

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 Ukraine 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 no trend and a short-term no trend. The Japanese market is in a medium-term no trend and in a short-term uptrend.

 

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 114 to 116yen.

 

This week will see the release of the FOMC minutes and US employment data, which will provide further clues on the timing of the first rate hike by the Fed. In addition, investors await the global PMI survey and the OPEC+ meeting which is expected to provide guidance on oil production plans from February. Other notable events include manufacturing orders in the U.S. and Germany, U.K. house prices, Eurozone inflation, and Japan's consumer confidence index.

 

Last week, the Nikkei 225 moved within the expected range. The upper price was about 260 yen below the assumed line and the lower price was about 90 yen above the assumed line. The expected range for the Nikkei 225 this week is between the Bollinger Band +2σ (currently around 29250 yen) on the upside and the 25-day line (currently around 28490 yen) on the downside.

 

This week, we are likely to see a series of back-and-forth moves on the dance floor before exiting the triangle to either the upper or lower side.