[Good Morning Market] Increased Volatility in US Stocks... "Decline Will Widen Due to Policy Vacuum"

Difficulty in Agreeing on 5th Stimulus Package
"Further Decline Expected in US Stock Market"

Respond with Large-Cap Stocks Like Semiconductors and IT Expected to Increase Earnings Next Year

Safe-Haven Asset 'Gold' Also Declining
Support Expected Around Early $1800 Range

[Asia Economy Reporter Minji Lee] Amid increased volatility in global stock markets, there is a forecast that the current trend may continue for the time being. To halt this trend, agreements on the 5th economic stimulus package and the Federal Reserve's (Fed) presentation of specific measures for the average inflation targeting system need to emerge, but it is difficult for these to be implemented within September. As the U.S. stock market is experiencing increased downward volatility, strategies to avoid risk (hedging) are necessary. Meanwhile, on the 24th (local time), the U.S. stock market saw a slight rise as counter-buying flowed into large tech stocks. The Nasdaq index closed at 10,672.27, up 0.37% from the previous session, while the Dow Jones and S&P 500 indices rose by 0.2% and 0.3%, respectively.

[Image source=Yonhap News]

◆ Sangyoung Seo, Kiwoom Securities Researcher = The U.S. stock market turned upward as counter-buying emerged following the previous day's plunge. Large tech stocks, which had experienced significant declines, were at the center. Technology stocks including Apple (1.03%) and semiconductor sector stocks such as Nvidia (1.85%) rose.

The difficulty in passing additional stimulus packages is increasing the possibility of selling pressure. This is because President Trump stated that if he loses the presidential election citing potential election fraud due to mail-in voting, he would refuse a peaceful transfer of power. The U.S. stock market has been sensitive to each issue. When the Democratic Party announced it was preparing a $2.4 trillion stimulus package, which was significantly different from the Republican Party's proposal, the market's decline widened, but it rebounded again when they mentioned readiness to negotiate with the Republicans.

◆ Daehun Han, SK Securities Researcher = The cause of the recent global stock market decline is sentiment. The market was influenced by the lack of concrete details compared to expectations in the recent Federal Open Market Committee (FOMC) meeting and statements from Fed Chair Powell and other members, as well as the reduced likelihood of passing stimulus packages due to President Trump's insistence on nominating a Supreme Court justice. Tesla's Battery Day and the resignation of Nikola's CEO also dampened investment sentiment toward tech stocks.

Investment sentiment, which had been elevated by policies and liquidity supply, has led to capital inflows into the stock market. Although liquidity supply continues, the weakening of policy power is a burden. The 5th economic stimulus package is practically unlikely to be agreed upon within this year. It is also a major issue in the upcoming U.S. presidential election, which will intensify starting with the TV debates.

As a result, to endure the policy gap period, it seems necessary to respond with buying large-cap stocks. Large-cap stocks such as semiconductors, automobiles, IT, and secondary batteries are expected to see an increase in net income estimates for next year, making this adjustment an opportunity for bottom-fishing. Although it is a difficult time due to the policy gap, the policy has not disappeared. In the mid-to-long term, it is advisable to respond with large-cap stocks that have higher earnings forecasts, which could present buying opportunities.

◆ Kyuyeon Jeon, Hana Financial Investment Researcher = Amid increased volatility in global stock markets, the U.S. dollar has strengthened, leading to a decline in gold prices. This is because concerns over the spread of the novel coronavirus (COVID-19) in Europe have increased demand for the U.S. dollar. Since gold is traded in U.S. dollars, this lowers gold's relative value. Despite this, gold prices are falling more steeply than the rise in the dollar due to increased preference for cash amid heightened stock market volatility.

The decline in expected inflation is also fueling the drop in gold prices. The U.S. Federal Reserve introduced the average inflation targeting system to drive expected inflation and lower real interest rates, but the financial market is not moving as the Fed expects. The 10-year Breakeven Inflation Rate (BEI), which reflects inflation expectations in the financial market, has been declining throughout September. This reflects skepticism about whether inflation can actually exceed 2%.

There is likely to be a short-term adjustment in gold prices for the time being. Gold prices are expected to find support in the low $1,800 per ounce range. Nevertheless, there is potential for gold prices to rise. This is because the U.S. Fed is expected to maintain near-zero interest rates until 2023, and the U.S. dollar is likely to continue a weakening trend in the mid-to-long term. The political battles leading up to the U.S. presidential election in November are expected to drive demand for gold as a safe-haven asset, creating a favorable investment environment.