Outlook for the Nikkei average this week [19-Jun- 2022]

 [Present state recognition of fundamental]

In the U.S. market last week, the Fed's decision to raise interest rates by 0.75%, or three times the normal rate, at the FOMC meeting led to a sharp weekly decline in stock indexes as investors became increasingly wary that sharp monetary tightening would lead to an economic recession.

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 3.40 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 16.1 and the Nikkei 225's expected PER of 12.6 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 3.40 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 22.0, or if the Nikkei 225 is about 45400 yen compared to the current price of the Nikkei 225. The Japanese market is undervalued by about 19440 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 ¥19,440. Weakness in the Japanese market narrowed somewhat.

 

[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 +0.1%, 28.4 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 2.92 to 3.01, causing the U.S. dollar to move against the yen in the range of ¥131 to ¥135. The dollar index rose +0.44% 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 week of June was likely overbought, the third week of June was oversold, and this week is expected to be oversold. Of the five points last week, ① was the bearish one. 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 16.2 points (about 4210 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 6.3 points in the medium to long term (about 1640 yen, which is calculated in the Nikkei 225).

 

During the week, the strength of the Japanese market relative to the U.S. market narrowed. Volatility in the U.S. market increased, with the VIX rising from last week to 31.13. It is trending higher, above 30, which is indicative of heightened investor anxiety at the highest levels.

 

The Nikkei 225 is below the 9-day and 25-day lines. This is a "red light" for the short-term trend.

The Nikkei 225 is under the Ichimoku Kinko Chart's cloud. The Nikkei 225 turned negative at -14.4%, compared to last week, and the divergence from the 200-day moving average was -7.0%, widening the negative gap. The divergence from the 200-day moving average was -7.0%, widening the negative divergence. 3 factors are negative, indicating a "red light" in 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. 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 downtrend and a short-term downtrend.

 

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 133-136 yen range.

 

This week, most attention is likely to be focused on the May consumer price indexes for the United Kingdom and Canada. Also likely to be closely watched will be the manufacturing PMIs for the U.S. and the Eurozone. Other economic indicators to be released include U.S. existing home sales, new home sales, bank stress tests, Bank of Japan policy meeting minutes, and the People's Bank of China interest rate decision.

 

Last week, the Nikkei 225 fell far below its assumed range. The upper price was about 980 yen below the assumed line and the lower price was about 1,350 yen below the assumed line. This week, the Nikkei 225 is expected to move between the Bollinger Band -1σ on the upside (currently around 26450 yen) and the Bollinger Band -3σ on the downside (currently around 25210 yen).

 

While volatility is high and rising, selling pressure on credit is declining. This week, the Nikkei 225 is expected to move between the Bollinger Band -2σ, although a near-term rebound is likely.