Outlook for the Nikkei average this week [06-March-2022]

 [Present state recognition of fundamental]

In the U.S. market last week, stock indexes fell due to uncertainty over the situation in Ukraine and the negative impact of sanctions against Russia on the global economy.

Weekly volatility NY Dow: -1.30%, NASAQ: -2.78%, S&P 500: -1.27%.

                                       

On the other hand, medium- to long-term risks include concerns about the prolonged conflict in Ukraine, energy costs, concerns about a slowdown in the global economy due to prolonged supply chain disruptions, and concerns about the bursting of the real estate bubble and economic slowdown in China. This also raises concerns about the advent of stagflation. Furthermore, we need to continue to pay attention to geopolitical risks in East Asia and the Middle East.

 

The difference in the yield spread between the Japanese and U.S. markets is that the Japanese market is 1.29 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 19.3 and the Nikkei 225's expected PER of 12.5 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 1.29 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 14.9, or if the Nikkei 225 is about 31000 yen compared to the current price of the Nikkei 225. The Japanese market is undervalued by about 5010 yen in the medium to long term.

 

From a fundamental perspective, the Japanese market can be said to be unattractive for 5010 yen.Weakness in the Japanese market has improved

 

[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

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, the NY Dow 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 25-day line.

②    As a result of the announcement of quarterly financial results, the forecasted ROE of Nikkei 225 stocks was 9.3%, an improvement of 0.2 points from three months ago. The profit growth rate was +29.3%, 5.4 points worse than three months ago.

③    U.S. long-term interest rates declined and the interest rate differential between the U.S. and Japan narrowed from 1.76 to 1.58, moving the yen against the dollar in the range of ¥115 to ¥114. The dollar index rose +2.04% 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 February was oversold and the first week of March was likely oversold, so overselling is expected this week. Of the five points last week, ①, ③, and ⑤ were bearish. ①②③⑤ are expected to have an impact.

 

[Technical viewpoint]

Looking at the Japanese market from a technical perspective, it is overvalued by 1.4 points (about 360 yen in terms of the Nikkei 225) over the medium to long term in terms of the gap between the 200-day divergence rate and the NASDAQ. On the other hand, the 200-day divergence from NYDow is 5.9 points (about 1530 yen in terms of the Nikkei 225) undervalued over the medium to long term.

 

Weakness in the Japanese market relative to the U.S. market was magnified during the week. Volatility in the U.S. market was high, with the VIX at 31.98, up from last week. Investor anxiety is high at the highest levels.

 

The Nikkei 225 is below the cloud in the equilibrium table. The total divergence rate widened to -19.3% compared to last week. The divergence from the 200-day moving average widened to -8.6%, 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. In the short-term trend, the "red light" is on.

 

In the U.S. markets, NYDow is below the 200-day lines and the 25-day line but above the 9-day line. 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 "yellow 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 Ukraine conflict, 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 no trend. 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 114 to 115 yen.

 

This week, the U.S. Consumer Price Index for February will likely be the focus of attention. In addition, CPI for the U.S., China, and Germany will be released, and the ECB will make monetary policy decisions. Other economic indicators to be released include the U.S. trade balance for January and the University of Michigan consumer confidence index for March. Meanwhile, market volatility is expected to remain high.

 

Last week, the Nikkei 225 fell below its expected range. The upside was almost in line with the assumed line, but the downside was about 170 yen below the assumed line. This week, the Nikkei 225 is expected to move between the -1σ Bollinger band (currently around 26430 yen) on the upside and the -3σ Bollinger band (currently around 25460 yen) on the downside.

The Volatility Index is expected to remain high this week, so it is likely to move between the Bollinger Bands -2σ.