[Good Morning Stock Market] Is It Too Early to Talk About a 'Rebound'? Focus on Economic Indicators

[Asia Economy Reporter Oh Ju-yeon] The Jeonju KOSPI sharply closed higher from 1482.46 on the 23rd to 1717.73 on the 27th. It rose close to the 1760 level during the session, marking a weekly increase of nearly 300 points. As a result, there was a premature wave of optimism in the market, suggesting a possible V-shaped rebound. However, subsequent declines of over 3% in the U.S. stock market and the global surge in confirmed cases of the novel coronavirus infection (COVID-19) have cast new clouds over the domestic stock market. Attention is needed on the economic indicators to be released this week.

◆ Kim Young-hwan, KB Securities Researcher = Since 1945, during seven recessions and stock market corrections, without exception, the stock market bottomed only after confirming negative growth in Gross Domestic Product (GDP). This was also true in cases like 1973 and 2008, when financial system crises occurred and were overcome.

U.S. GDP is expected to contract in the second quarter of 2020, and if history repeats itself, the stock market correction is more likely to conclude in the second quarter rather than the first.

For now, since the stock market has escaped the possibility of a financial system crisis, the likelihood of the KOSPI falling below its previous low is considered low. However, given that the real economic shock from COVID-19 has not yet fully begun, it is judged that the stock market will find it difficult to rise trend-wise without a second correction.

The current rebound target for the KOSPI is around 1860, which corresponds to a 50% retracement of the index's decline. If a second correction occurs, the expected correction level is 1590, applying a 30% decline from the January high. It is considered more prudent to buy stocks after entering the second correction phase rather than chasing purchases at the current level above 1700.

◆ Ha In-hwan, Meritz Securities Researcher = Following last week's U.S. initial jobless claims, this week will see the release of U.S. employment data, the Institute for Supply Management (ISM) manufacturing index, and China's manufacturing Purchasing Managers' Index (PMI). Interest in these economic indicators is expected to rise significantly as they provide analysis on how COVID-19 is impacting the real economy.

While paying attention to economic indicators, there is another factor that needs monitoring: the credit rating Upgrade to Downgrade ratio (the ratio of credit rating upgrades to downgrades, where a value close to zero indicates more downgrades). Investors less familiar with the bond market might not know this, but the concept is simple. It is the number of companies with upgraded credit ratings divided by the number of companies with downgraded ratings. A higher ratio is positive, while a lower ratio is negative. Currently, if the tail risk in the financial market is collateralized loan obligations (CLOs), monitoring this Upgrade to Downgrade ratio is also necessary. At present, the Upgrade to Downgrade ratio for U.S. companies, especially high-yield firms, is close to zero.

◆ Seo Sang-young, Kiwoom Securities Researcher = The Korean stock market is expected to experience increased volatility due to concerns over economic contraction stemming from the sharp rise in COVID-19 cases in the U.S. Notably, last week’s surge in U.S. initial jobless claims to 3.28 million and the anticipated further increase this week are expected to dampen investor sentiment. Additionally, the rapid increase in U.S. confirmed COVID-19 cases, which surpassed 120,000 as of the 18th, is a burden. The rapid increase in testing samples in the U.S. is also expected to accelerate the rise in confirmed cases, adding to concerns.

However, the possibility of improvement in China’s economic indicators compared to the previous month and the recent news over the weekend about the U.S. discussing a three-month global tariff suspension are expected to have a somewhat positive effect on investor sentiment. Considering these factors, the Korean stock market is expected to face increased volatility due to burdens from the surge in COVID-19 cases in the U.S. and Europe, weak economic indicators raising recession fears, and the decline in international oil prices following the end of OPEC production cuts.