Outlook for the Nikkei average this week [22-May- 2022]

 [Present state recognition of fundamental]

In the U.S. market last week, stock indexes fell due to growing concerns that inflation will weigh on corporate profits and uncertainty surrounding the economic slowdown.

Weekly volatility NY Dow: -2.90%, NASAQ: -3.82%, S&P 500: -3.05%.

                                       

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 1.38 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 17.2 and the Nikkei 225's expected PER of 12.9 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 1.38 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 15.7, or if the Nikkei 225 is about 32500 yen compared to the current price of the Nikkei 225. The Japanese market is undervalued by about 5770 yen in the medium to long term.

 

From a fundamental perspective, the Japanese market can be said to be unattractive for 5770 yen.

Weakness in the Japanese market narrowed as the long-term interest rate differential between the U.S. and Japan 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　Increase in profit forecast for the current fiscal year above the previous year's level

③ Further depreciation of the yen due to the widening interest rate gap between Japan and the U.S.

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 the NYDow can return above the 25-day line.

②    As a result of the announcement of quarterly financial results, the forecasted ROE for the Nikkei 225 indexes came in at 9.0%, 0.1 points worse than three months ago. In addition, the profit growth rate was +1.9%, 28.8 percentage 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 2.69 to 2.55, moving the dollar against the yen in the range of ¥129 to ¥127. The dollar index fell -1.38% for the week.

④    The OECD's nominal GDP growth rate for Japan and the U.S. in 2023 is expected to be +1.8% for Japan and +4.9% for the U.S., so the Japanese market is 3.1 percentage points inferior in this aspect.

⑤    The second of May was likely oversold, the third week of May was overbought, and this week is expected to be overbought. Of the five points last week,①and ③ were bearish. ①②③⑤ are expected to have an impact.

 

[Technical viewpoint]

Looking at the Japanese market from a technical perspective, the difference in 200-day divergence from the NASDAQ is relatively high by 16.8 points (about 4490 yen when calculated for the Nikkei 225) over the medium to long term. On the other hand, in terms of the difference in 200-day divergence from the NYDow, it is overvalued by 5.8 points in the medium to long term (about 1550 yen, which is calculated in the Nikkei 225).

 

Weakness in the Japanese market relative to the U.S. market narrowed during the week. Volatility in the U.S. market increased, with the VIX rising from last week to 29.43. It remains below 30, which is indicative of heightened investor anxiety at the highest levels, but remains elevated.

 

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

The Nikkei 225 is in the Ichimoku Kinko Chart's cloud. The overall divergence was -4.5%, a smaller negative figure compared to last week. The deviation from the 200-day moving average was -4.4%, a smaller negative range. Since the two factors are negative, a "yellow signal" is lit for the medium-term trend.

 

In the US market, the NYDow is below 9-day and the 25-day and the 200-day line. It is below the clouds on the Ichimoku Kinko Chart. The NASDAQ is below the 9-day and the 25-day and the 200-day line and the 200-day line. It is below the clouds on the Ichimoku Kinko Chart.

This 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, a positive factor is the maintenance of the Bank of Japan's monetary easing policy.

 

Looking at the technical aspects, the U.S. market is down a medium-term down trend and a short-term down trend. The Japanese market is in a medium-term no trend and a short-term up 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 128 to 126 yen.

 

This week, most attention is likely to focus on the release of the U.S. FOMC minutes. Also of interest will likely be the German and UK PMIs. Other economic indicators to be released include the U.S. housing index, durable goods orders for April, and personal income and personal consumption expenditures for April.

 

Last week, the Nikkei 225 fell below its assumed range. The upside was about 460 yen below the assumed line and the downside was about 170 yen below the assumed line. This week, the Nikkei 225 is expected to move between the Bollinger Band +2σ on the upside (currently around 27490 yen) and the Bollinger Band -1σ on the downside (currently around 26310 yen).

 

Volatility is high but trending lower, and selling pressure on credit is improving. The Nikkei 225 is expected to rebound this week.