[Good Morning Stock Market] Foreign Selling Pressure and Liquidity Concerns... Avoid Volatility

[Asia Economy Reporter Ji Yeon-jin] Last week, as the stock markets of major countries around the world experienced sharp fluctuations, there are calls for strategies to avoid volatility until the overheated market cools down. Concerns are growing over excessive liquidity supply due to the aftermath of COVID-19, along with recent short-selling issues related to the US online gaming company GameStop and expectations of continued foreign selling following the termination of MSCI index futures trading on the Singapore Exchange. Although the development of COVID-19 vaccines remains a positive factor, US inflation, which will influence liquidity supply, still remains.

◆ Park So-yeon, Analyst at Korea Investment & Securities = The increased volatility in the stock market last week was a liquidity issue far removed from fundamentals. Since the outbreak of COVID-19 last year, despite weak fundamentals, optimism dominated the market due to abundant liquidity, making it difficult to take liquidity issues lightly. It is important to note that central governments have begun to recognize various problems caused by excessive liquidity supply for the first time. Last week, a People’s Bank of China official mentioned asset bubbles, absorbing liquidity in the short-term money market, causing interest rates to surge,

and at the January US Federal Open Market Committee (FOMC) press conference, questions arose about whether the Federal Reserve also bears responsibility for asset bubbles, citing GameStop. This atmosphere is quite different from last year when indiscriminate liquidity distribution was justified due to the spread of COVID-19. Even if a rebound occurs, the momentum is expected to be quite weak. The KIS stock market sentiment index has just started to rebound from the overbought zone. It is recommended to wait for the bubble in the US call options market, which caused the gamma squeeze, to deflate and enter during a stabilization phase. The US options expiration day is the third Friday of every month, and premiums usually decline sharply from the second week, so short-term volatility is expected to subside around the second week of February.

◆ Kim Il-hyeok, Strategist at KB Securities = Global pharmaceutical company Johnson & Johnson is applying for emergency use authorization for its COVID-19 vaccine this week. According to Johnson & Johnson’s announcement, the final clinical trial involving 44,000 participants across eight countries, including the US, confirmed a 66% preventive efficacy. Although this is significantly lower than the 95% efficacy of the Pfizer-BioNTech vaccine and the 94.1% of the Moderna vaccine, experts evaluate the results as meaningful because Johnson & Johnson conducted clinical trials during a period with many variant viruses. Pfizer and Moderna vaccines were tested before the surge of variant viruses. Moreover, Johnson & Johnson’s vaccine showed 72% efficacy in the US, but only 57% in South Africa. However, including the results from South Africa, it showed 85% efficacy against severe cases, and none of the clinical trial participants were hospitalized or died. This means that although the probability of infection may be higher compared to those vaccinated with Pfizer-BioNTech and Moderna vaccines, the likelihood of progressing to severe illness is lower. Johnson & Johnson’s vaccine costs about one-quarter of the Pfizer-BioNTech vaccine and two-thirds of the Moderna vaccine. Novavax’s vaccine, which is undergoing large-scale clinical trials in the UK and South Africa, also showed high efficacy against variant viruses. In an interim evaluation of 62 participants, it showed 89.3% efficacy, and when limited to variant viruses, 85.6%.

Attention is also drawn to improvements in US consumption. In the US, personal income slightly increased in December last year, while consumption decreased, leading to a rise in the savings rate. Since May last year, government transfer income had been decreasing month-on-month, but it slightly increased in December due to the resumption of household cash support. Therefore, it is expected to increase more significantly in January when household cash support is fully implemented. After a large increase in government transfer income due to household cash support in May last year, personal consumption expenditures rose sharply from June. The savings rate, which indicates consumption capacity, also rose from 12.9% in November last year to 13.7% last month. This consumption improvement is expected to lead to inflation. Personal Consumption Expenditures (PCE) inflation rose 0.4% month-on-month, and core PCE inflation increased 0.3%, exceeding the forecast of 0.1%.