Outlook for the Nikkei average this week [5-July-2020]

[Present state recognition of fundamental]

Stock indices rose in the U.S. markets last week as better-than-expected economic releases continued. On the other hand, in the medium to long term, the spread of new types of pneumonia, an inward political situation centered on the world's own country, a lack of creditworthiness and credit crunch of banks, a slowdown in China and other economies, a fear of a slowdown in the global economy due to trade wars, etc. The geopolitical risks of the Middle East, the Korean Peninsula and Ukraine need continued attention.

The difference in the yield spread between the Japanese and U.S. markets is the published OECD real GDP forecast for 2021 The Japanese market is overvalued by 0.20 points, considering the announced OECD real GDP forecast for 2021. The reason for the overvaluation is the difference between the P/E of the S&P500 at 25.1 and the expected P/E of 18.1 of the Nikkei 225 stocks for the current fiscal year, as well as the difference between Japanese and U.S. interest rates and GDP growth.

This means that if the difference in the GDP growth rate between Japan and the U.S. in 2021 is further decrease by 0.30% 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 term is around 17.5, or if the Nikkei 225 is around 21520 yen, the Japanese market is overvalued by 790 yen in the medium to long term.

[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 UP of expected profit increase rate for the current term more than before

③ Expansion of the interest rate differential between Japan and the US and further depreciation of the yen

④ Upward revision of Japan's 2021 GDP estimate (now -0.5%) by OECD

⑤ Foreign investors over-buying

Looking at recent movements

①    Last week's NYDow weekly trend was positive. The daily footstep is under the 200-day line and above the clouds of the Ichimoku kinko table, while the weekly NASDAQ weekly trend was positive. The daily footstep is above the 200-day line and above the clouds of the Ichimoku kinko table. This week, all eyes will be on the housing index, the quarterly earnings release, ISM Non-Manufacturing Index and Weekly New Jobless Claims for June. It will be interesting to see if NYDow can get back above the 25-day line.

②    As a result of the announcement of the quarterly financial results, the forecasted ROE of the Nikkei 225 stocks was 5.9%. 1.4 points worse than 3 months ago. Profit growth was -2.5%, an improvement of 9.6 percentage points compared to three months ago.

③    US. long-term interest rates rose, the interest rate gap between Japan and the U.S. widened from 0.64% to 0.65%, and the foreign exchange rate declined. The yen was weak in the 107s to 108s..

④    The OECD's real GDP growth forecasts for Japan and the U.S. for 2021 were released, and Japan's GDP growth rate is expected to be -.0.5%. The U.S. market is expected to be up 1.9%, which means that the Japanese market is 2.4 points worse off in this respect.  

⑤    The 4th week of Jun is a over selling. There is a high possibility that the 1st week of July is a over selling, and this week we are forecasting to over selling.

last week, ① was a bullish factor but ⑤ was bearish factor. It seems that ①,②,③,⑤④ will be affected this week.

[Technical viewpoint]

From a technical perspective on the Japanese market, the difference in the 200-day deviation rate from NASDAQ is 14.3 points (about 3290 yen when considering the Nikkei 225 average) over the medium to long term. Compared to last week, the price range has decreased.

The Nikkei is above the clouds of the Ichimoku Kinko table. The overall deviation rate was +10.5%, a positive margin shrank from the previous week. The 200-day moving average deviation rate was +1.9%, a positive margin shrank from the previous week. As the three factors are positive, the mid-term trend is lit with a "green signal". The Nikkei average is under the 25_day moving average line but above the 9_day moving average line, "yellow signal" is lit for short-term trends.

In the US market NY Dow is under the 200_day line and the 25_day line but above the 9_day line. It is above the cloud of ichimoku table. NASDAQ is above the 200_day average line and the 25_day average line and the 9_day average line. It is above the cloud of the ichimoku table. In the short term "yellow signal" is lit and in the medium term "yellow signal" is lit.

[Outlook for this week]

Looking at the US market fundamentally, concerns such as interest rate hikes in the United States, US-China trade friction, US political uncertainty, North Korea issues are receding However, Spread of pneumonia infection by new coronavirus, falling crude oil prices, worsening U.S. corporate earnings, falling high yield bond markets , global long-term interest rate decline trend, financial market turmoil caused by credit slumps, lack of creditworthiness and political situation of EU banks, global economic slowdown concern with trade war, geopolitical risk of the Middle East and Ukraine Etc exist as a risk factor.

Real estate prices in China are flat in large cities, but the problems of nonperforming loans in China as a whole such as excessive facilities have not been resolved. If you hurry up the process, it will lead to a short-term market drop, and if you delay proceeding, there is concern that the economic recession will be prolonged.

In addition, although the LIBOR interest rate has recently been declining, in March, the LIBOR interest rate has risen despite a decline in short-term interest rates, so there is a concern that financial instability may recur.

On the other hand, good news is the US zero interest rate policy, the Fed's direct financial support to companies including the purchase of junk bonds, economic measures of $ 2 trillion, and President Trump's policy expectations, monetary easing measures such as the Bank of Japan's 2% inflation target, the introduction of negative interest rates and the purchase of unlimited Japanese government bonds and 12 trillion yen in ETFs, as well as expectations for economic measures by the Japanese government that exceed the level of the Lehman Shock, large-scale economic measures by the EU countries, and the ECB's announcement of deepening negative interest rates and expanding quantitative easing.

Looking at the technical aspect, the US market is no trend in the medium term, and no trend in the short term. The Japanese market is upward trend in the medium term, and no trend in the short term.

An analysis of the foreign exchange market last week shows that long-term interest rates in the U.S. rose, the gap between Japan and the U.S. long-term interest rates widened, and the yen price has moved in a weaker direction. The price is expected to be in the 107 to 108 yen range this week.

From now on, we need to pay attention to technical indicators, US market trends, exchange rate movements, and foreign investor trends.

Last week, the Nikkei 225 moved within the expected range. The upper price was about 380 yen below the assumed line and the lower price matched the assumed line. The assumed range of the Nikkei 225 for this week is the Bollinger Band +1σ (currently around 22810 yen). A move to the downside is expected between the Bollinger Band -1σ  (currently around 22090 yen).