Outlook for the Nikkei average this week [09-October 2022]

 [Present state recognition of fundamental]

Stock indices rebounded briefly last week in the U.S. market, buoyed by expectations of a dovish change of direction by the Fed.

Weekly change NY Dow: +1.99%, NASAQ: +0.73%, S&P 500: +1.51%.

                                       

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 4.13 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 16.3 and the Nikkei 225's expected PER of 12.1 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 4.13 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 26.1 or if the Nikkei 225 is about 56340 yen compared to the current price of the Nikkei 225. The Japanese market is undervalued by about 29230 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 ¥2920. Last week, the weakness of the Japanese market diminished.

 

[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 +3.5%) 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 the clouds of the equilibrium chart. NASDAQ weekly trend was positive. The daily footstep is under the 200-day line above the clouds of the equilibrium chart. This week, we will be watching to see if the NYDow can return above the 9-day line.

②    As a result of the announcement of the quarterly financial results, the estimated ROE of the Nikkei225 index was 9.2%, an improvement of 0.2 percentage points from three months ago. In addition, the profit growth rate was +4.5%, an improvement of 4.4% points from three months ago.

③    U.S. long-term interest rates rose and the interest rate differential between the U.S. and Japan widened from 3.60 to 3.64, moving the dollar against the yen in the range of ¥143 to ¥145. The dollar index rose +0.91% for the week.

④    The OECD's nominal GDP growth rate for Japan and the U.S. in 2023 is expected to be +3.54% for Japan and +4.88% for the U.S., so the Japanese market is 1.34 percentage points inferior in this aspect.

⑤    It was oversold in the September 4 week and likely was oversold in the October 1 week, and is expected to be oversold 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 15.0 points (about 4070 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 10.5 points in the medium to long term (about 2850 yen, which is calculated in the Nikkei 225).

 

The strength of the Japanese market relative to the U.S. market increased during the week. The VIX, a measure of U.S. market volatility, was 31.4, slightly lower than the 30 level, a sign of strong investor anxiety, but still above 30.

 

The Nikkei 225 is below the 9-day line but below the 25-day line. The short-term trend is "yellow light".

The Nikkei 225 is under the Ichimoku Kinko Chart's cloud. and the overall divergence is -2.7%, narrowing from the previous week. The divergence from the 200-day moving average was -0.7%, narrowing the negative margin. 3 factors are negative, indicating a "red light" in the medium-term trend.

 

In the US market, the NYDow is below 9-day line 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 line 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 also in a short-term downtrend. The Japanese market is also in a medium-term downtrend and a short-term no trend.

 

Analysis of the foreign exchange market shows that in 2020, the yen was moving in the direction of gradual appreciation, but has been trending lower since 2021. This week, the yen is expected to be in the range of 144-146 yen.

 

This week will be a very busy week in the U.S. with the start of earnings season, FOMC meeting minutes, speeches by several Fed officials, and September inflation and retail sales data. In the U.K., unemployment, industrial production, and GDP data will be released, while in China, inflation and trade statistics will be released. Other highlights will be India's inflation rate and the Bank of Korea's decision to raise interest rates.

 

Last week, the Nikkei average moved above its assumed range. The upper price was about 760 yen above the assumed line and the lower price was about 450 yen above the assumed line. This week, the Nikkei 225 is expected to move between the Bollinger Band +1σ (currently around 28030 yen) on the upside and the Bollinger Band -1σ (currently around 26620 yen) on the downside.

 

U.S. markets rallied last week and volatility declined for the week. Both Japan and the U.S. rebounded temporarily as sellers repurchased their shares. This week is likely to be a week of looking for a second bottom.