Outlook for the Nikkei average this week [17-July- 2022]

 [Present state recognition of fundamental]

In the U.S. market last week, stock indexes fell for the week on the back of caution about the economic slowdown in China and the European economic slowdown caused by the shutdown of natural gas from Russia to Europe.

Weekly volatility NY Dow: -0.16%, NASAQ: -1.57%, S&P 500: -0.93%.

                                       

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 3.00 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 16.4 and the Nikkei 225's expected PER of 13.0 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 3.00 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 21.2, or if the Nikkei 225 is about 43770 yen compared to the current price of the Nikkei 225. The Japanese market is undervalued by about 16980 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 16980 yen. Weakness in the Japanese market has narrowed as the interest rate differential between the U.S. and Japan has 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 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%, 27.9 percentage points worse than three months ago.

③    Although U.S. long-term interest rates declined and the interest rate differential between the U.S. and Japan narrowed from 2.84 to 2.70, the U.S. dollar moved toward a weaker yen in the range of ¥135 to ¥139. The dollar index rose +1.02% 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    It was likely overbought in the July 1 week and overbought in the July 2 week, and is expected to be overbought this week. Of the five points last week, (1) and (3) were 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 13.4 points (about 3590 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 5.2 points in the medium to long term (about 1390 yen, which is calculated in the Nikkei 225).

 

During the week, the strength of the Japanese market relative to the U.S. market expanded. The VIX, which indicates the volatility of the U.S. market, was 24.23, below the 25 level, which is indicative of heightened investor anxiety, and is trending lower.

 

The Nikkei 225 is above the 9-day line and the 25-day line. The short-term trend is "green".

The Nikkei 225 is under the Ichimoku Kinko Chart's cloud. The Nikkei 225 is now trading below the Ichimoku Kinko Chart. The Nikkei 225's overall divergence is -2.1%, a smaller negative divergence than last week. The divergence from the 200-day moving average was -3.1%, a smaller negative divergence. 3 factors are negative, indicating a "red light" in the medium-term trend.

 

In the US market, the NYDow is above 9-day line 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 line but below 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 up trend. The Japanese market is in a medium-term downtrend 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 138-140 yen range.

 

This week, all eyes will be on corporate earnings and housing-related data in the United States. Elsewhere, the ECB, Bank of Japan, and People's Bank of China will hold monetary policy meetings, and the United Kingdom, Canada, and Japan will release their June inflation figures. Also of interest will be preliminary manufacturing and services PMIs from the U.S., Germany, France, the U.K., and the eurozone.

 

Last week, the Nikkei 225 remained mostly within the assumed range. The upper price was about 90 yen above the assumed line and the lower price was about 250 yen above the assumed line. This week, the Nikkei 225 is expected to move between Bollinger Band +3σ (currently around 27420 yen) on the upside and Bollinger Band +1σ (currently around 26770 yen) on the downside.

 

Volatility is trending lower and selling pressure on credit is also decreasing. This week, the Nikkei 225 is expected to move between the +2σ Bollinger bands.