[Good Morning Stock Market] Anxiety Over Anti-Racism Protests Offset by Economic Reopening Optimism

"Focus on Cyclical Stocks Rather Than Untact Stocks"

[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] As protests against racial discrimination related to the death of a Black person in the United States spread worldwide, they stirred anxiety in global stock markets, but the expectation of economic reopening offset this concern. Analysts suggest maintaining a positive view on cyclical stocks rather than untact (contactless) stocks, considering the trend of economic reopening.

◆ Yumi Kim, Kiwoom Securities Researcher = The US dollar declined as the New York stock market rose on expectations of economic recovery and the euro strengthened on hopes of stimulus from the European Central Bank. Although protests against racial discrimination related to the ‘Black death incident’ in the US triggered anxiety in financial markets, the recovery expectations from the resumption of economic activities offset this, leading to a rise in the New York stock market. On the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 25,742.65, up 1.05% (267.63 points) from the previous session. The S&P 500 index rose 0.82% (25.09 points) to 3080.82, and the Nasdaq index closed up 0.59% (56.33 points) at 9608.37.

This stimulated risk asset preference and acted as a bearish factor for the dollar. The euro strengthened as the European Central Bank is expected to increase its pandemic emergency purchase program from 750 billion euros (about 1024 trillion won) to up to 500 billion euros at this week’s meeting. The 1-month New York offshore non-deliverable forward (NDF) USD/KRW rate is expected to open at 1220.07 won, down 6 won. Reflecting the dollar weakness, downward pressure is expected to dominate.

◆ Daejun Kim, Korea Investment & Securities Researcher = Sector rotation will occur. Cyclical stocks are performing relatively better than untact stocks. This reflects preemptive expectations of economic normalization. Cyclical stocks occupy many of the top relative returns compared to the KOSPI 200. The top spot was taken by shipbuilding, boosted by rising oil prices and Qatar LNG ship order momentum. Banks, energy, and automobiles followed. Among untact sectors, only software slightly outperformed the market return. Telecommunications and media sectors were relatively weak.

Going forward, cyclical stocks are likely to maintain relative superiority for some time. Several variables support the strength of cyclical stocks. First is the economic surprise. This year, the US economy has effectively entered a recession phase due to the impact of COVID-19. The probability of recession reached 100%, and various economic indicators sharply declined. However, as a reaction, expectations for the economy have been significantly lowered. In other words, even slight improvements in indicators caused surprises. When May’s indicators turned out better than expected, the surprise index rose, and confidence in economic recovery gradually appeared.

The resumption of consumer activities is also a major factor. Despite ongoing protests in the US, actual consumption is gradually recovering. Unlike economic indicators that lack timeliness, meaningful improvements are seen in real consumption data. Electricity consumption in New York State has started to increase, and citizens’ outdoor activities are rising. The visitor growth rate for the restaurant reservation service OpenTable has been recovering since last month.

Investment activation in China is also positive. Inventories of copper, the metal most consumed in China, are rapidly decreasing. Prices of bitumen (asphalt), used for road paving, are also rising. The increased use of industrial metals and chemical products can be interpreted as a sign that China’s investment activities are restarting. Considering factors such as the rebound in oil prices and consumer sentiment, the view on cyclical stocks in the stock market may become more favorable than before.