[Good Morning Stock Market] US Stocks Rise on Soaring Oil Prices... "COVID-19 Turning Point Not Yet"

Expectations of Prolonged COVID-19 Lead Inflation to Retreat to 1.6%
Emerging Markets Inject Liquidity to Stimulate Economy... "Dollar Stabilization Comes First"

[Asia Economy Reporter Minji Lee] The US New York stock market recorded a rise of over 2%. It is analyzed that the sharp rebound in international oil prices, which had been plummeting, contributed to stabilizing the financial market. On the 2nd (local time), the Dow Jones Industrial Average closed at 21,413.44, up 2.24% (469.93 points). The S&P 500 and Nasdaq indices rose 2.28% and 1.72%, respectively. Although the COVID-19 pandemic has caused a surge in unemployment, the rise in oil prices, which had fueled financial market anxiety, improved investor sentiment.

[Image source=Yonhap News]

◆ Heejin Kwon, Researcher at Korea Investment & Securities = The turning point of COVID-19 has not yet been observed. As the number of confirmed cases in the US is increasing at an accelerating rate, New York Governor Cuomo mentioned that the number of patients will peak by the end of April. If the COVID-19 situation prolongs, deflationary pressure will inevitably increase. This is because demand contraction limits upward pressure on prices. To recover the economy after COVID-19, it is necessary to properly manage inflation expectations.

Currently, US inflation expectations have retreated to around 1.6%. The downward trend in oil prices caused by the chicken game among oil-producing countries and the worsening economic outlook seem to be pulling down inflation expectations as well. In March, prices fell by 0.4% compared to the previous month.

The disappearance of inflation expectations inevitably slows down consumption and production activities. Producing and purchasing goods without expecting prices to rise becomes meaningless. Although the decline in inflation expectations is not an immediate problem, it could become an obstacle at the time of economic recovery.

President Trump's statement that he can end the oil price war through talks with the leaders of Russia and Saudi Arabia is positive. If further declines in oil prices are limited, the downward trend in inflation expectations can be somewhat contained.

◆ Jaeseon Lee, Researcher at Hana Financial Investment = Emerging countries are also beginning to revise downward the global payment growth rate due to the spread of COVID-19. Credit rating agency Moody's forecasted the economic growth rate of G20 countries at -0.5%, and predicted negative growth for Latin American countries such as Brazil (-1.6%) and Mexico (-3.7%).

In response, central banks of emerging countries are showing strong intentions for stimulus policies. The central banks of Poland and South Africa declared indefinite purchases of corporate bonds and government bonds without specifying the scale. In Asia and emerging countries, the Philippine central bank plans to purchase $6 billion in government bonds over the next six months. The Brazilian central bank announced a simple purchase plan of about 1.2 trillion reais (281 trillion won), the largest among emerging countries, and has requested constitutional amendments.

The willingness of central banks to implement stimulus policies to minimize economic shocks is positive. However, emerging countries have limited capacity to inject unlimited money like advanced countries. Unlike advanced countries holding reserve currencies, emerging countries face risks such as currency depreciation, capital outflows, and rising inflation. The expensive dollar is also a problem.

In the current situation, stabilizing the dollar, which can buffer the side effects of stimulus policies, is important. Reflecting on the financial crisis, after the liquidity indicators turned downward, currency appreciation and stock market rebounds occurred.