Weekly Seminar on Interpreting the Market 2021 July 26 Domestic and international earnings announcements—week to assess both

Weekly Seminar on Interpreting the Market

July 26, 2021 Issue

Lecturer: Ryuuji Kojiro (こうじろりゅうじ)

【A Week to Assess Domestic and International Earnings】

This week, domestic stocks are likely to attempt a rebound again, driven by the sharp rise in U.S. stock prices observed last week. However, the upside is expected to be limited as we assess the impact of worsening domestic COVID-19 infections on the economy and political situation. In particular, assuming a mild downward tilt in the medium-term trend, the upper target range around mid-28,000s, where the 25-day moving average (as of last week’s close is 28,490 yen) sits, will be watched.

Meanwhile, the front-loaded earnings season in Japan will reach a climax on the 28th (73 companies scheduled to announce), the 29th (156 companies), and the 30th (466 companies), during which the content (such as revisions to earnings forecasts for the current year) will be scrutinized.

On the other hand, U.S. stocks this week are expected to remain solid as the earnings season for April-June enters the final stretch, with GAFAM results in focus. In particular, a substantial decline in U.S. long-term interest rates will support stock prices. However, if the FOMC meeting held on the 27-28 indicates an earlier start of tapering than market expectations (from earlier this year), markets could become nervous, which is important to note.

＜Concerns about Lagging Behind Global Trends＞

（Clear gap between Japan and U.S. stock performance）

Last week the Nikkei Stock Average tended to test its downside, dropping to 27,388 (closing price on Tuesday the 20th) and closing the year with a negative annual return as it fell below the previous year-end close of 27,444. However, with U.S. stocks firm during Japan’s holidays, this week is expected to start by recovering to the 28,000 level.

Nevertheless, the performance gap relative to U.S. stocks has widened clearly. A graph with the end-of-last-year value set at 100 shows the Nasdaq index at 115.1 and the NY Dow at 114.6 by last week’s end, while the Nikkei Stock Average remains at only 100.4. In other words, year-to-date performance is Nasdaq up 15.1%, Dow up 14.6%, while the Nikkei is up only 0.4%.

In particular, this month has shown opposing movements: compared to the end of last June set at 100, Nasdaq is at 102.3 (up 2.3%), Dow at 101.6 (up 1.6%), while the Nikkei is at 95.7 (down 4.3%), indicating a decline.

Even if the Nikkei rises sharply to 28,200 in the early part of this week (the 26th), it would still be 2.1% lower than the end of last month. To move back into positive territory, it would need to surpass the end-of-last-month level of 28,791.

（Infections continue to weigh）
The gap between Japan and the U.S. is widening because, as noted last week, the spread of COVID-19 is delaying the economic recovery.

Although the number of infections is not as high as in Europe and America and the healthcare system is not overwhelmed, the government’s insistence on containing a new strain means that it is unclear when economic activity will significantly expand, which weighs on stock prices.

If the government pressures financial institutions and liquor wholesalers to ban alcohol service at restaurants (although this did not go through), and companies cannot be proactive about expanding production and investment, that will further dampen sentiment.

Moreover, as the state of emergency measures reach a fourth phase with diminishing effectiveness, the scenario of a lower house election and a general election around the first half of September after the Paralympics ends (seen as favorable to the ruling party) could be challenged, which would deter foreign investors from buying and keeping valuations high. Even if the ruling party’s majority seems unlikely, the risk is not zero, so there is little impetus to push stock prices higher.

（Unclear Position in the Global Trend）
Furthermore, amid major shifts in global currents, Japan’s unclear stance is a factor that weighs on stock price upside.

Two key currents are as follows.

① Decarbonization
② U.S.-China confrontation

These two currents are driving a paradigm shift in global politics and economics. It remains unclear how Japanese companies will respond, and even less clear what position the Japanese government will take.

In particular, the current situation shows Japan’s passive stance. While the West and China seek to create a new global standard, Japan does not demonstrate the leadership to take the initiative and seems to be merely following changes, which is problematic. If this continues, Japanese companies may be driven into a disadvantageous position unilaterally.