Outlook for the Nikkei average this week [23-January-2022]

 [Present state recognition of fundamental]

In the U.S. market last week, stock indices fell sharply as there was a persistent belief that the Fed's early monetary tightening would lead to a slowdown in the economy.

Weekly change NY Dow: -4.58%, NASAQ: -7.55%, S&P 500: -5.68%.

                                       

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 0.95 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 20.1 and the Nikkei 225's expected PER of 13.5 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 0.95 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 15.5, or if the Nikkei 225 is about 3150 yen compared to the current price of the Nikkei 225. The Japanese market is undervalued by about 4070 yen in the medium to long term.

 

From a fundamental point of view, it can be said that the Japanese market is unattractive for 4,070 yen.

The weakness in the Japanese market has improved as the US-Japan interest rate differential has narrowed.

 

[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 under the 200-day line and the clouds of the equilibrium chart. NASDAQ weekly trend was negative. The daily footstep is under the 200-day line and the clouds of the equilibrium chart. This week, we will be watching to see if NYDow can get back above the 200-day line.

②    As a result of the announcement of the quarterly financial results, the forecasted ROE of Nikkei 225 stocks was 9.2%. This is the same level as three months ago. In addition, the profit growth rate was +35.2%, an improvement of 2.2 points from 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 1.65 to 1.63, causing the dollar to move higher against the yen in the range of 115 yen to 113 yen. The dollar index rose +0.49% 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 January was oversold, the third week of January was likely oversold, and this week is expected to be oversold. Last week, among the five points, ①, ③and ⑤ were bearish. ①②③⑤ are expected to have an impact.

 

[Technical viewpoint]

From a technical point of view, the Japanese market is overvalued in the medium to long term by 2.5 points (about 690 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 610 yen in terms of the Nikkei 225) undervalued over the medium to long term.

During the week, the weakness of the Japanese market against the US market improved. In the U.S. market, selling pressure increased and changed to higher volatility compared to the Japanese market. In both the US and Japanese markets, the volatility index exceeded 25, indicating that investors' anxiety is further increasing.

 

The Nikkei 225 is below the cloud in the equilibrium table. The total divergence rate widened to -12.0% compared to last week. The divergence from the 200-day moving average widened to -4.3%, 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 below the 200-day line and the 25-day lines and the 9-day line, and the equilibrium cloud. It is below the cloud on the equilibrium chart.

The NASDAQ is below the 200-day line, and the 25-day and 9-day lines. It is below the cloud on the equilibrium chart.

It is a "red light" in the short term and a "red 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 down trend and a short-term down 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 114 to 112yen.

 

This week will be marked by monetary policy decisions by the central banks of the US and Canada. The earnings season will also be one of the busiest, with quarterly results from Apple and Microsoft. Other noteworthy data will be the preliminary PMIs for the US, UK, Eurozone, Japan, and Australia, as well as Q4 GDP for the US, Germany, and France. Other important data include consumer spending in the US and business surveys in the Eurozone.

 

Last week, the Nikkei 225 fell below the assumed range. The upper price was about 260 yen below the expected line, and the lower price was about 460 yen below the expected line.  The expected range of the Nikkei 225 for this week is between the Bollinger Band -1σ (currently around 28030 yen) on the upside and the Bollinger Band -3σ (currently around 27080 yen) on the downside.

 

This week, the price is likely to move up and down between the descending Bollinger Band -2σ.