[Good Morning Stock Market] US Stocks Plunge Amid Flood of Sell Orders Seeking a 'Pretext' for Decline

Decline Amid Corporate Earnings Slump and Speculative Trading... Concerns Over PBOC Tightening Also Weigh
"Likely a Temporary Phenomenon... Rebound Buying May Occur"

Traders are at work on the floor of the New York Stock Exchange on the 26th (local time). Major indices paused ahead of earnings reports from large tech companies and the Federal Open Market Committee (FOMC) meeting results.
[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] The U.S. stock market closed down over 2%. Analysts attribute the sell-off to weak corporate earnings, speculative trading, and concerns over China's tightening measures.

On the 27th (local time) at the New York Stock Exchange, the Dow Jones Industrial Average closed at 30,303.17, down 2.05% from the previous day. The S&P 500 ended at 3,750.77, down 2.57%. The tech-heavy Nasdaq also fell 2.61% to 13,270.60.

◆ Sangyoung Seo, Kiwoom Securities Researcher= The U.S. stock market declined as concerns over weak corporate earnings, speculative trading, and China's tightening measures came to the forefront. However, similar to the 2013 case, it was highlighted that this was a temporary phenomenon with limited potential for expansion, which led to some rebound buying. In May 2013, then-Fed Chair Ben Bernanke mentioned tapering (reducing asset purchases), and in June, concerns about China's tightening intensified, causing China's SHIBOR to surge and index volatility to increase. That correction was temporary, likely due to rising expectations for economic recovery and earnings improvement.

Meanwhile, Federal Reserve Chair Jerome Powell mentioned the continuation of stimulus measures during a press conference, but selling pressure persisted. This is interpreted as the market expecting measures beyond mere continuation.

Previously, in November last year, the People's Bank of China stated it would no longer flood the market with liquidity, and in December, it signaled tightening by indicating a gradual slowdown in credit growth in 2021. On the 18th, the PBOC eased tightening concerns by stating that the policy stance would continue this year, but this week, liquidity supply was halted, causing SHIBOR to surge and reigniting tightening fears. This news contributed to volatility, with South Korea and Hong Kong markets falling over 2% on the 26th. Although the PBOC promptly asserted that stimulus measures would continue once liquidity issues arose, this served as a pretext, maintaining market pressure.

Additionally, speculative trading expanded around individual stocks such as GameStop, which also contributed to overall investor sentiment deterioration. Speculative trading based on liquidity rather than legitimate corporate value can increase stock volatility. Meanwhile, the Fed announced through the Federal Open Market Committee (FOMC) that the pace of economic recovery has slowed but is expected to maintain its monetary policy stance. However, concerns about economic recovery added pressure, leading to further declines. The market had hoped for more stimulus from Chair Powell, but as the measures remained at past levels, the sell-off intensified. Ultimately, the market sought a 'pretext' for decline and sold off stocks that had experienced significant gains.

The domestic stock market is also expected to be affected. With concerns about China's tightening and volatility expansion among some small companies related to short selling, a 'panic sell' is presumed to have occurred. This is expected to weigh on the KOSPI, which has risen the most among major markets (up 8.7% since the beginning of the year).

However, the previous day, the People's Bank of China reassured the market by stating it would not hastily shift to tightening, stabilizing market sentiment. It is also important to note that the 2013 adjustment was temporary and that the market eventually resumed its upward trend amid expectations for corporate earnings and economic recovery. In the short term, attention should be paid to movements in China's SHIBOR, which will be announced during the trading day, as well as the earnings reports of individual companies released today.

Meanwhile, major companies such as Apple, Tesla, and Facebook, which announced earnings after the U.S. market close, are also expected to weigh on sentiment as their stocks are declining. Considering this, the South Korean stock market is expected to start lower and continue to absorb selling pressure.