[Weekly Market Outlook] Short-Term Correction Likely as US-China Conflict Reignites

[Image source=Yonhap News]

[Asia Economy Reporter Eunmo Koo] This week, the domestic stock market is expected to keep the possibility of a short-term correction open as tensions between the U.S. and China escalate again over the Hong Kong National Security Law (Hong Kong Guk-an-beop). However, optimism about economic recovery remains, supporting a valid mid- to long-term upward outlook through the end of the year.

Last week (25th-29th), the domestic KOSPI market experienced a mixed week amid hopes for a COVID-19 treatment and concerns over deteriorating U.S.-China relations surrounding the enactment of the Hong Kong National Security Law. According to the Korea Exchange on the 31st, the KOSPI closed at 2,029.60 points, up 59.47 points (3.02%) from the previous week. Institutional and individual investors net bought 485.9 billion KRW and 32.9 billion KRW respectively, while foreign investors net sold 680.9 billion KRW.

This week, the KOSPI is expected to face pressure on its recovery due to signs of renewed political tensions between the U.S. and China. Yoon Young-gyo, a researcher at Cape Investment & Securities, said, “As the U.S. mentions the possibility of re-strengthening trade regulations against China and China passes the Hong Kong Security Law, the likelihood of renewed conflict between the two countries has increased. The market is discussing new tariffs and additional restrictions on Chinese companies as potential U.S. sanctions, and with the U.S. administration about five months away from the presidential election, a stronger response is highly likely.” He added, “Due to the recent liquidity-driven rapid rise in stock prices, if this negative factor emerges, it will pose a significant burden on the stock index going forward.”

Labor-gil Noh, a researcher at NH Investment & Securities, also pointed out that concerns about the intensification of friction between the two countries could slow the pace of KOSPI’s recovery. Noh said, “The U.S. possibility of revoking Hong Kong’s special status could lead to export tariffs from Hong Kong and suspension of visa-free entry for Americans, affecting bilateral trade and economic activities. With the offshore yuan exchange rate approaching the psychological support level of 7.2 yuan per dollar, tensions are rising, and the stock market impact will vary depending on the scope of U.S.-China friction.”

However, expectations for economic improvement remain, supporting a valid mid- to long-term upward outlook. Noh said, “Despite weak real economy indicators, the rebound in sentiment indicators continues, and growing expectations for real economy improvement in the second half of the year are positively influencing investment sentiment. The ongoing possibility of COVID-19 vaccine development within the year and expectations for a ‘V’-shaped economic recovery will provide momentum for the stock market’s recovery trend.”

Researcher Yoon also diagnosed, “With the Bank of Korea’s decision to cut the base interest rate at the May Monetary Policy Committee and the downward revision of growth forecasts, the economic downturn due to COVID-19 appears to be mostly reflected in policy.” He added, “Looking at past cases, the stock index bottom is likely near when policy changes reach their final stages, and the mention of a policy shift by the Federal Reserve within financial markets is evidence that the bottom has been confirmed. Despite burdens from weak economic indicators, the recent rapid rise and the fact that the negative factors arising in May have not been reflected at all will trigger a short-term correction, but the mid- to long-term upward outlook remains valid.”