Outlook for the Nikkei average this week [12-Jun- 2022]

 [Present state recognition of fundamental]

In the U.S. market last week, stock indices ended the week sharply lower on caution about aggressive monetary tightening by the Fed in the fall and beyond, following the ECB's decision to raise interest rates and a higher-than-market-expected growth rate in the CPI in May.

Weekly volatility NY Dow: -4.58%, NASAQ: -5.60%, S&P 500: -5.05%.

                                       

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 3.19 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 16.9 and the Nikkei 225's expected PER of 13.3 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 3.19 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 23.1, or if the Nikkei 225 is about 48360 yen compared to the current price of the Nikkei 225. The Japanese market is undervalued by about 20540 yen in the medium to long term.

 

From a fundamental perspective, the Japanese market can be said to be less attractive than the U.S. market by ¥20,540.

The OECD's nominal GDP forecast has been revised, and the weakness of the Japanese market has been significantly magnified.

 

[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%, 0.2 points worse than three months ago. In addition, the profit growth rate was +0.4%, 28.0 percentage points worse than three months ago.

③    U.S. long-term interest rates rose and the interest rate differential between the U.S. and Japan widened from 2.70 to 2.92, causing the dollar/yen to move in a weaker yen range from 130 to 134 yen. The dollar index rose +1,98% 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 first week of June was oversold, the second week of June was likely oversold, and this week is expected to be oversold. Of the five points last week, ③ was bullish. 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 19.6 points (about 5450 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 8.9 points in the medium to long term (about 2480 yen, which is calculated in the Nikkei 225).

 

During the week, the strength of the Japanese market relative to the U.S. market expanded. Volatility in the U.S. market has increased, with the VIX at 27.75, up from last week. It is still below 30, which is indicative of heightened investor anxiety at the highest levels, but it is on the rise.

 

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 above the Ichimoku Kinko Chart. The Nikkei 225 is now above the Ichimoku Kinko's Kumo (equilibrium) cloud, and the overall divergence is +6.2%, a smaller positive divergence than last week. The divergence from the 200-day moving average was -0.4%, a smaller negative divergence. Since two factors are positive, the medium-term trend has a yellow light.

 

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. 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 in a medium-term downtrend and a short-term downtrend. The Japanese market is in a medium-term no trend and a short-term up trend.

 

Analysis of the foreign exchange market shows that in 2020, the yen was moving in the direction of a gradual appreciation, but as we move into 2021, the yen continues to trend lower. This week, the yen is expected to be in the 132-135 yen range.

 

This week, the FOMC and Fed Chair Powell's press conference will likely receive the most attention. Also, the Bank of Japan and the U.K. monetary policy announcements are likely to be closely watched. Other economic indicators to be released include the U.S. producer price index for May, retail sales for May, the New York Fed business index for June, Japan's first quarter GDP, and China's industrial production and retail sales.

 

Last week, the Nikkei 225 remained within the assumed range. The upper price was about 340 yen below the assumed line and the lower price was about 100 yen above the assumed line. This week, the Nikkei 225 is expected to move between the Bollinger Band + 2σ (currently around 28370 yen) on the upside and the 25-day line (currently around 27020 yen) on the downside.

 

Volatility is high and rising, and selling pressure on credit is also on the rise. The Nikkei 225 is expected to fall to the 25-day line this week; whether or not it breaks below the 25-day line will be the focus of attention.