[Good Morning Stock Market] COVID-19 Resurgence... Stock Market Volatility Expansion Inevitable

US Stock Market Hits Record High Despite COVID-19 Crisis... Growing Concerns
Trump Administration's China Containment Adds Uncertainty

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Minwoo Lee] The transmissibility of the novel coronavirus infection (COVID-19) has exceeded the World Health Organization (WHO)'s expectations, prolonging the situation. It is forecasted that investment sentiment will shrink and uncertainty will inevitably increase. In particular, in a situation where corporate earnings are not supportive, factors such as the burden on the sharply rising U.S. stock market and U.S. President Donald Trump's containment of China are expected to continue increasing volatility until mid-next month.

◆ Namjung Moon, Researcher at Daishin Securities = The transmission power and incubation period of COVID-19 are estimated to be higher than the preliminary reproduction number (R0) maximum of 2.5 and incubation period maximum of 14 days initially estimated by the WHO at the early stage of the outbreak. The virus is released in large amounts during the early stage of the disease, resulting in high initial transmissibility, and a study by the University of Texas stating that its transmissibility is up to 20 times higher than SARS is rekindling anxiety.

With the expansion of COVID-19's influence, two factors are likely to emerge as causes of increased stock price volatility until mid-next month. First, the valuation burden, which will become controversial again. Despite the COVID-19 situation, the U.S. stock market has been hitting historic highs again this month. The 12-month forward price-to-earnings ratio (PER) of the S&P 500 is 18.8 times, significantly exceeding the recent 5-year average of 16.8 times. Investors may increasingly feel burdened by the sharply rising U.S. stock market in a situation where corporate earnings are not supportive.

The Trump administration's containment of China is also increasing unease. Taking advantage of the Chinese government's full efforts to prevent the spread of COVID-19, measures are being pushed to curb China's semiconductor rise. This involves restricting the use of U.S.-made semiconductor manufacturing equipment by China, limiting foreign companies' use of U.S. military and security-related technologies. Chinese companies must obtain approval from the U.S. Department of Commerce if they use U.S.-made semiconductor manufacturing equipment to produce semiconductor chips. This indicates that despite the conclusion of the Phase One trade agreement between the two countries, the U.S. can still initiate disputes against China at any time.

◆ Yeo-sam Yoon, Researcher at Meritz Securities = Risk assets, compared to safe havens confirmed by the decline in major countries' interest rates and the strength of the dollar and gold, have held up relatively well centered on the U.S. stock market. Although the financial environment indices of the U.S. and Europe have recently faltered, they have risen to the highest levels since 2016, proving accommodative liquidity conditions. Now, it is necessary to assess the possibility of changes in these conditions. Based on S&P 500 futures, futures prices fell 1.4% in the Asian market on the 24th, but the U.S. stock market's decline from all-time highs was limited. The U.S. economic momentum (surprise index) is favorable, and liquidity and corporate earnings are also factors supporting stock prices. The Chinese stock market, the source of the problem, has mostly recovered its losses through monetary power.

The important issue is whether global financial market instability will lead to weakness in the U.S. stock market and affect liquidity conditions. Stock market volatility can weaken U.S. liquidity conditions and trigger financial instability. If short-term liquidity conditions are shaken like this, high-risk bonds with weak credit ratings may be hit.