[Good Morning Stock Market] "Volatility Calms More Than Rise... Need to Confirm Market Stability as Policy Effects Become Visible"

[Asia Economy Reporter Eunmo Koo] Although extreme volatility in domestic and international stock markets has subsided, the volatility of risk assets such as emerging market currencies and crude oil continues to burden investors. However, as internal supply and demand support strengthens the downside reliability of the domestic stock market, a gradual rebound is expected.

◆Seonghoon Seo, Researcher at Samsung Securities=The global stock market has succeeded in escaping the panic zone, but the still-high waves of ups and downs urge investors to remain cautious. Although the craving for cash assets has diminished, investing them in risk assets remains a burdensome phase. The excuse of foreign investors who have conducted 22 consecutive days of net selling in the domestic stock market is presumed to be no different. The fact that the volatility of other risk assets such as emerging market currencies and crude oil is also considerable adds to the burden.

In particular, the expansion of crude oil volatility functions as a downside factor for the stock market by triggering concerns about corporate credit tightening. Considering that many U.S. speculative-grade bonds are composed of energy companies, a decline in crude oil prices could cause shocks throughout the corporate bond market. In fact, international crude oil prices and U.S. speculative-grade bond spreads show a high correlation. Additionally, the stock prices of the energy sector and stock market volatility have recently formed a close relationship. This indicates that the financial market shocks propagated by crude oil price fluctuations are significant. Fortunately, U.S. President Donald Trump’s mediation between Russia and Saudi Arabia has prompted crude oil to attempt a rebound. The fact that the Organization of the Petroleum Exporting Countries (OPEC) itself emphasizes the necessity of a production cut consultative body involving all oil-producing countries is also positive.

The phenomenon of the dollar’s strength not easily weakening also limits the rebound of risk assets. Despite the U.S. Federal Reserve’s (Fed) unlimited quantitative easing, swap line agreements with major countries, and the opening of a repurchase agreement (REPO) window for central banks (FIMA), the dollar index, after a brief lull, is again approaching the 100 mark. The background of this dollar strength lies in the persistent preference for safe assets, active liquidity supply by monetary authorities outside the U.S., and globally confirmed weak economic indicators reflecting the impact of COVID-19, which reflects the dollar’s countercyclical characteristic (increased demand during recessions).

Along with this, the fact that the U.S. Treasury is issuing a massive amount of fiscal securities (T-bills, short-term bonds) ahead of unprecedented fiscal stimulus is also triggering dollar strength. The Treasury’s active bond issuance absorbs dollar liquidity in the market. The record-high cash balance of the Treasury deposited at the Fed since the financial crisis explains this well. However, the likelihood of this dollar strength continuing is low. Since massive fiscal stimulus is a foregone conclusion, dollar liquidity within the Treasury will soon be released into the market. Various liquidity supply measures currently underway by the Fed will also have a delayed ripple effect.

Economic indicators directly reflecting the impact of COVID-19 and the resulting downward revision of corporate earnings may act as factors limiting the upside of the stock market in the future. However, the current index level largely reflects the earnings decline of domestic companies and only limitedly applies expectations from policy support. The price-to-book ratio (PBR), still at 0.70 times, well illustrates the current state of the domestic stock market. For further rebound, the volatility of various financial indicators mentioned earlier needs to subside, and foreign investors’ active buying participation must be confirmed. However, this is likely to occur with a time lag. The downside of the index may become more solid due to the influence of individual investors and domestic policy support funds. Nevertheless, the rebound process afterward may take some time.

◆Yeeun Kim, Researcher at IBK Investment & Securities=The chicken game surrounding international crude oil, one of the volatility factors in the stock market, has also raised expectations for easing due to President Trump’s intervention. However, as the spread of COVID-19 continues and uncertainties remain in crude oil, volatility is expected to persist.

While the global impact of COVID-19 continues, financial market volatility has eased compared to before, and investor sentiment has somewhat stabilized. With limited impact based on fundamentals, the important event this week is the start of the first-quarter earnings season. The first quarter’s earnings decline was anticipated, and with the possibility of an earnings shock increasing, the key issue is how long the earnings slump will continue. Therefore, whether Samsung Electronics can defend an operating profit of 6 trillion won will be a major focus of the market this week.

Despite the market rebound, investor sentiment remains subdued. Therefore, it is necessary to observe a bit more despite the index rebound, and investing with interest in industries that will grow after COVID-19 subsides will be a wise strategy.

This content was produced with the assistance of AI translation services.