Outlook for the Nikkei average this week [16-October 2022]

 [Present state recognition of fundamental]

In the U.S. markets last week, stock indices had mixed weekly movements as stock prices overreacted to the ups and downs in long-term interest rates.

Weekly volatility NY Dow:+1.15%  NASAQ:-3.11%  S&P 500:-1.55%.

                                       

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 4.28 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 12.6 and 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 4.28 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 27.3 or if the Nikkei 225 is about 58670 yen compared to the current price of the Nikkei 225. The Japanese market is undervalued by about 31580 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 ¥31580. The weakness of the Japanese market was magnified last week..

 

[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 negative. 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 +4.8%, an improvement of 4.6% 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 3.64 to 3.78, moving the dollar against the yen in the range of ¥145 to ¥148. The dollar index rose +0.49% 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    The October 1 week was overbought; the October 2 week was likely oversold, and this week is expected to be oversold. Last week, of the five points, 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 16.9 points (about 4580 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 9.1 points in the medium to long term (about 2470 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, rose slightly to 32.0, above the 30 mark, a sign of strong investor anxiety.

 

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 -2.2%, narrowing from the previous week. The divergence from the 200-day moving average was -0.6%, 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 global economic slowdown due to the spread of the new coronavirus have receded, but risk factors include inflation and rising interest rates due to the Russia-Ukraine war and economic slowdown due to energy shortages and deteriorating political conditions in the EU, U.S.-China trade friction, financial market turmoil caused by the bursting of the Chinese real estate bubble and credit contraction, 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 144-149 yen.

 

In the U.S., the main events of interest this week will be earnings reports, speeches by several Fed officials, and housing-related data. In the U.K., investors will also be closely watching financial markets following the government's change in policy toward tax cuts. In China, the 20th National Congress of the Communist Party of China is scheduled to be held and the third quarter GDP growth, industrial production, and retail sales will be released. Inflation data from the U.K. Japan, Canada, and New Zealand will also be released、

 

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. stock indexes were volatile and mixed last week. Volatility was at a high level and rose slightly for the week. This week will be a test of whether the Nikkei 225 can continue to rebound from its second bottom.