Outlook for the Nikkei average this week [10-January-2022]

 [Present state recognition of fundamental]

In the U.S. market last week, stock indices fell due to caution about the Fed's rush to normalize monetary policy.

Weekly change NY Dow: -0.29%, NASDAQ: -4.53%, S&P 500: -1.87%

                                       

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 0.96 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 21.3 and the Nikkei 225's expected PER of 13.9 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 0.96 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 16.1, or if the Nikkei 225 is about 32880 yen compared to the current price of the Nikkei 225. The Japanese market is undervalued by about 4400 yen in the medium to long term.

 

From a fundamental point of view, the Japanese market is unattractive for 4,400 yen.

Compared to last week, the range of undervaluation has shrunk. This is mainly due to the widening gap in long-term interest rates between Japan and 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 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 but under 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 9.2%, 0.1 points worse than three months ago. In addition, the profit growth rate was +35.4%, an improvement of 0.8 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 1.45 to 1.59, causing the dollar to move in the direction of a weaker yen in the range of 114 yen to 116 yen. The dollar index rose slightly to +0.07% 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 fifth week of December was overbought and the first week of January was likely oversold, and this week is expected to be oversold. Last week, of the five points, ① 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 2.6 points (about 740 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 5.0 points (about 1420 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 NY Dow increased. Selling pressure has increased in the Japanese market, making it more volatile than the US market.

The Nikkei 225 is below the cloud in the equilibrium table. The total divergence rate turned negative at -3.2% compared to last week. The divergence from the 200-day moving average widened to -1.2%, and three factors are negative, indicating a "red light" in the medium-term trend.

The Nikkei 225 is below the 25-day and 9-day lines. The short-term trend is showing a "red light".

 

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

The NASDAQ is above the 200-day line, but below the 25-day and 9-day lines. It is below 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 down trend and in a short-term down 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 115 to 116yen.

 

This week, the U.S., China, India, and Brazil will release their inflation rates for December, while GDP for the U.K. and Germany, and industrial production for the U.S., Eurozone, India, and Mexico will be in focus. Other important data include retail sales and consumer confidence in the US, current account balance and producer prices in Japan, and trade balance and retail sales in Australia.

 

Last week, the Nikkei 225 fell below the expected range. The upper price matched the assumed line and the lower price was about 310 yen below the assumed line. The expected range of the Nikkei 225 for this week is between the upper Bollinger Band +1σ (currently around 28990 yen) and the lower Bollinger Band -2σ (currently around 27820 yen).

 

This week will be a critical time for the market to bounce back to or below the lower limit of the triangle.