Outlook for the Nikkei average this week [13-March-2022]

 [Present state recognition of fundamental]

In the U.S. market last week, stock indices fell on the back of caution about the negative impact of the escalating Russian-Ukrainian conflict and tight energy supply and demand on the global economy.

Weekly volatility NY Dow: -1.99%, NASAQ: -3.53%, S&P 500: -2.88%.

                                       

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 1.61 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 18.9 and the Nikkei 225's expected PER of 12.2 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 1.61 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 15.2, or if the Nikkei 225 is about 31290 yen compared to the current price of the Nikkei 225. The Japanese market is undervalued by about 6130 yen in the medium to long term.

 

From a fundamental perspective, the Japanese market can be said to be unattractive for 6,130 yen.

The long-term interest rate gap between Japan and the U.S. has widened and the weakness of the Japanese market has widened.

 

[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 9.2%, an improvement of 0.1 points from three months ago. The profit growth rate was +29.1%, 6.5 points worse than three months ago.

③    Long-term interest rates in the U.S. rose and the interest rate differential between the U.S. and Japan widened from 1.58 to 1.81, causing the dollar/yen to move toward a weaker yen in the range of ¥114 to ¥117. The dollar index rose +0.63% 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 first week of March was oversold, the second week of March was likely oversold, and this week is expected to be oversold. Of the five points last week, ① 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 1.7 points (about 430 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 5.4 points (about 1360 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 improved slightly during the week. Despite the high volatility in the U.S. market, investor anxiety remains high at the highest levels, although the VIX has declined slightly from last week to 30.75.

The Nikkei 225 is below the 25-day and 9-day lines. In the short-term trend, the "red light" is on.

The Nikkei 225 is below the cloud in the equilibrium table. The total divergence rate widened to -25.7% compared to last week. The divergence from the 200-day moving average widened to -11.3%, and three factors are negative, indicating a "red light" in the medium-term trend.

 

In the U.S. markets, NYDow is below the 200-day lines and the 25-day line and 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 "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 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.

 

From a technical standpoint, the U.S. market is in a medium-term downtrend and a short-term downtrend 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 117 to 115 yen.

 

This week, the U.S. FOMC meeting will likely be the focus of attention. In addition, CPI for the Eurozone and Japan will be released, and monetary policy decisions will be made by the U.K. and Japan. Other economic indicators to be released include the U.S. Federal Reserve Bank of New York business index, retail sales for February, and industrial production for February. Meanwhile, market volatility is expected to remain high.

 

Last week, the Nikkei 225 fell below its expected range. The upside was about 100 yen below the assumed line and the downside was about 160 yen below the assumed line. This week, the Nikkei 225 is expected to move between the 25-day line (currently near 26560 yen) on the upside and Bollinger Band -2σ (currently near 24840 yen) on the downside.

The Volatility Index is expected to remain high this week, so it is likely to move between the Bollinger Bands -1σ.