Outlook for the Nikkei average this week [31-July- 2022]

 [Present state recognition of fundamental]

In the U.S. markets last week, stock indexes rose for the week after passing through the FOMC and preliminary GDP releases for the April-June period without a stir.

Weekly volatility NY Dow: +2.97%, NASAQ: +4.70%, S&P 500: +4.26%.

                                       

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 3.33 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 17.4 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 3.33 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 22.7, or if the Nikkei 225 is about 48750 yen compared to the current price of the Nikkei 225. The Japanese market is undervalued by about 20950 yen in the medium to long term.

 

From a fundamental perspective, it can be said that the Japanese market is less attractive than the U.S. market by 17430 yen. The weakness of the Japanese market has been 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 positive. The daily footstep is under the 200-day line and in the clouds of the equilibrium chart. NASDAQ weekly trend was positive. The daily footstep is under the 200-day line and in 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 9.2, 0.1 points worse than three months ago. In addition, the profit growth rate was +3.4%, 24.6 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 2.55 to 2.48, moving the dollar against the yen in the range of ¥137 to ¥132. The dollar index fell -0.67% 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 4 week and overbought in the July 3 week, and is expected to be overbought this week. Of the five points last week, ① 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 9.6 points (about 2670 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 4.2 points in the medium to long term (about 1170 yen, which is calculated in the Nikkei 225).

 

During the week, the strength of the Japanese market relative to the U.S. market narrowed. The VIX, a measure of U.S. market volatility, was 21.33, below the 25 level that indicates rising 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 above the Ichimoku Kinko Chart. The Nikkei 225 is now above the Ichimoku Kinko's Kumo (equilibrium) cloud, and the divergence from the 200-day moving average is +2.1%. The divergence from the 200-day moving average is +2.1%, turning positive. 3 factors are positive, indicating a "green light" for 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 above 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 above the clouds on the Ichimoku Kinko Chart.

This is a "green light" in the short term and a "yellow 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 no trend and a short-term up trend. The Japanese market is in a medium-term up 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 134-131 yen range.

 

This week, most attention will be focused on the July jobs report in the United States. Monetary policy in the U.K. and Australia will also be of interest. Other economic indicators will include the July ISM Manufacturing Index and ISM Non-Manufacturing Index in the United States. Also of interest is the impact of the OPEC Plus meeting on oil prices.

 

Last week, the Nikkei 225 remained mostly within the assumed range. The upper price was about 30 yen above the assumed line and the lower price was about 720 yen above the assumed line. This week, the Nikkei 225 is expected to move between the Bollinger Band +2σ (currently around 28180 yen) on the upside and the 25-day line (currently around 26930 yen) on the downside.

 

Volatility is trending lower and selling pressure on credit is also decreasing, so we expect the Nikkei 225 to be firm this week.