[Weekly Market Outlook] Uncertainty Remains Amid COVID-19 Spread

[Image source=Yonhap News]

[Asia Economy Reporter Eunmo Koo] Concerns in the financial market over the novel coronavirus infection (COVID-19) are expected to continue this week as well.

Last week (2nd to 6th), the domestic KOSPI market experienced a rollercoaster trend due to the impact of COVID-19. The KOSPI rose for four consecutive days starting from the 2nd, but as the number of confirmed cases increased, investor sentiment was suppressed again, leading to a sharp drop on the 6th. According to the Korea Exchange on the 8th, the KOSPI recorded 2,040.22 points last week, up 53.21 points (2.67%) compared to the previous week. Foreign and institutional investors net sold 2.2176 trillion KRW and 1.0742 trillion KRW respectively, while individual investors net bought 3.0712 trillion KRW.

Market concerns over COVID-19 are expected to persist this week (9th to 13th). Kim Byung-yeon, a researcher at NH Investment & Securities, stated, "We project the weekly KOSPI expected band to be between 2,030 and 2,140 points." He explained, "Although pandemic concerns in Europe are expanding due to the increase in new confirmed cases in Italy, if global COVID-19 indicators show a decrease in new cases similar to Korea, global confidence in COVID-19 response will expand."

Regarding the U.S. Federal Reserve's (Fed) emergency interest rate cut, various interpretations are possible. Researcher Kim said, "The Fed's rate cut was mainly to ease the tightening in the ultra-short-term financial market and quickly curb the widening of high-risk bond spreads, but the current indicator levels were not at a worrisome level compared to the past." He analyzed, "Even if the measure assumed an extreme scenario from a credit perspective, the 50 basis points (bp) emergency rate cut could raise suspicions that the U.S. economy is in an extremely bad state to warrant an unplanned rate cut."

He continued, "In this case, market participants are likely to continue expecting additional rate cuts and quantitative easing (QE) at regular meetings by referring to the emergency rate cuts in 1998 and 2008." He added, "Unless the Fed judged the fundamental situation as extreme, it is highly likely that they considered the situation similar to past emergency rate cuts such as the LTCM collapse in October 1998 and the 9/11 incident in September 2001."

Meanwhile, there is also analysis suggesting that the KOSPI may have already confirmed its bottom. Kim Young-hwan, a researcher at KB Securities, first cited the fact that past epidemic outbreaks acted as short-term adjustment factors but did not change the overall market direction. He explained, "Investors feel the fear of 'this time is different' whenever faced with an epidemic, but over time, the economy returned to a recovery trend." He added, "This repeated pattern also influenced the bottom formation process, and once the bottom was confirmed, a secondary sharp drop significantly below it did not occur."

He also pointed out that historically, the Fed's rate cuts in response to sudden adverse events were strong buy signals. Researcher Kim said, "In the past, during rate cuts responding to adverse events, there were doubts about the Fed's policy response capacity and the effectiveness of monetary policy, but ultimately, the Fed has demonstrated the power to lift the market."