Outlook for the Nikkei average this week [5-Jun- 2022]

 [Present state recognition of fundamental]

In the U.S. market last week, stock indices ended the week on a sour note as the May jobs report showed a larger-than-market-expected increase in the number of employees and caution about aggressive monetary tightening by the Fed.

Weekly volatility NY Dow: -0.94%, NASAQ: -0.98%, S&P 500: -1.20%.

                                       

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 1.54 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 18.1 and the Nikkei 225's expected PER of 13.4 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 1.54 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 16.8, or if the Nikkei 225 is about 34960 yen compared to the current price of the Nikkei 225. The Japanese market is undervalued by about 7200 yen in the medium to long term.

 

From a fundamental perspective, the Japanese market can be said to be unattractive for 720 yen.

The weakness of the Japanese market was magnified by the increase in long-term interest rates in the U.S. market and the widening of the Japan-U.S. interest rate differential.

 

[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 keep 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%, 0.3 points worse than three months ago. In addition, the profit growth rate was +0.4%, 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 narrowed from 2.52 to 2.70, moving the dollar against the yen in the range of ¥128 to ¥130. The dollar index rose +0.53% 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 fourth of May was likely oversold, the first week of June was overbought, and this week is expected to be overbought. 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 15.2 points (about 4220 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 4.5 points in the medium to long term (about 1250 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 falling from last week to 24.79. It is trending lower, below 30, which is indicative of heightened investor anxiety at the highest levels.

 

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 divergence between the Nikkei 225 and the 200-day moving average is +6.7%. The divergence from the 200-day moving average is -0.6%, which is a smaller negative divergence than last week's. Since both factors are positive, the medium-term trend has a yellow light.

 

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

This is a "green 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 uptrend. 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 129-131 yen range.

 

This week, most attention is likely to focus on the release of the U.S. CPI for May. The ECB's regular Governing Council meeting and President Lagarde's press conference will also likely be of interest. Other economic indicators to be released include the U.S. trade balance for April, Japan's first quarter GDP, and China's consumer price index.

 

Last week, the Nikkei 225 moved above its assumed range. The upside was about 120 yen above the assumed line and the downside was about 360 yen above the assumed line. This week, the Nikkei 225 is expected to move between the Bollinger Band +3σ on the upside (currently around 28110 yen) and the Bollinger Band +1σ on the downside (currently around 27210 yen).

 

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