[Good Morning Stock Market] Stock Market Cowers Amid Inflation Fears... "Rise Will Be Limited"

US Stock Market Closes Lower Amid Inflation, Weak Employment Data, and Trade Friction Concerns
Dow Down 0.38%

"Long-Term Interest Rates and Exchange Rates Expected to Continue Rising"

[Image source=Yonhap News]

[Asia Economy Reporter Minji Lee] The global financial markets are reacting to growing inflation fears. The U.S. stock market continued its downward trend as weak employment data was reflected, while in the bond market, long-term bond yields, influenced by inflation indices and economic recovery, showed an upward trend.

◆ Sangyoung Seo, Researcher at Kiwoom Securities = The U.S. stock market fell slightly amid rising concerns over inflationary pressures. In January, import prices rose 1.4% month-on-month, exceeding the forecast of 1.0%, with the energy sector showing a significant increase of 7.4% month-on-month following an 8% rise last month. Non-energy prices also rose 0.8% month-on-month, marking the largest monthly increase since April 2011. Retail sales increased by 5.3% month-on-month the previous day, further fueling inflation concerns.

The slow recovery in the labor market also had an impact. Initial jobless claims rose to 861,000, and last week's figure was revised upward from 793,000 to 848,000. Continuing claims were reported at 4,494,000, higher than the pre-COVID-19 level of around 1.7 million, indicating a sluggish employment recovery.

Concerns about U.S.-China trade friction also surfaced during the day. News emerged that the Biden administration is investigating U.S. overseas supply chain dependence on semiconductors, high-capacity batteries, and rare earth elements. Considering previous remarks about preparing for intensified competition with China, this is interpreted as preparing for friction with China.

As inflation pressure issues grow globally, domestic stock markets are also being affected. In the U.S. stock market, inflation fears persist, leading to profit-taking mainly in growth stocks. In the domestic market, foreign investors continue net selling in both spot and futures markets, maintaining a downward trend. Since the U.S. stock market reflects concerns about inflation, slow labor market growth, and potential friction with China, the domestic market's upside is expected to be limited.

Long-term bond yields to maintain upward trend but with slower pace

◆ Daejun Kim, Researcher at Korea Investment & Securities = The most notable variable in the stock market is the U.S. Treasury yield, as it leads global interest rates overall. Currently, long-term yields are approaching pre-COVID-19 levels. The 10-year U.S. Treasury yield is 55 basis points (1bp=0.01%) lower than 13 months ago, but yields on bonds over 20 years have narrowed the gap to 23bp.

The market is uneasy about the rapid rise in yields occurring before the U.S. economy has fully overcome COVID-19. U.S. yields are expected to maintain an upward trend next week but are unlikely to surge as sharply as last week. The recent rise in yields reflects both expectations of economic recovery and concerns about tapering asset purchases; the FOMC minutes confirmed the asset purchase stance but did not mention the timing of tapering.

This trend is expected to influence Korean interest rates, which move in tandem with U.S. rates. Domestic government bond yields are also expected to rise moderately. The recommended strategy is to increase exposure to sectors benefiting from rising interest rates. Comparing the relative returns of sectors classified by the Global Industry Classification Standard (GICS) with the 10-year government bond yield over the past decade, sectors with higher returns include financials, industrials, materials, and IT. Particularly, it is advisable to maintain a positive view on banks and insurance companies, which benefit from rising rates.

Dollar-Won exchange rate to fluctuate around the 1100 won level

◆ Kyuyeon Jeon, Researcher at Hana Financial Investment = Amid the growing influence of Donghak Ants (individual investors who entered the stock market during the COVID-19 crash) in the domestic market, the number of so-called Seohak Ants (Korean investors investing in overseas markets) has also increased significantly. Traditionally, overseas stock investments were dominated by public pension funds and financial institutions, accounting for over 90%. However, last year, individual overseas stock investments increased about ninefold compared to the previous year. This expansion of individual overseas investment is amplifying supply-demand effects in the foreign exchange market.

The recent strength of the U.S. dollar is due to reflation expectations following additional stimulus measures by the Biden administration. The U.S. dollar is expected to gradually strengthen during the economic recovery phase. The number of new COVID-19 cases in the U.S. is steadily decreasing, and vaccines are being distributed steadily, raising expectations for normalization.

Considering these factors, the dollar-won exchange rate is expected to fluctuate around the 1100 won level before rebounding. Taking into account supply-demand changes for the dollar due to expanded individual overseas investment, the possibility of a stronger U.S. dollar amid accelerated U.S. economic recovery, and the yuan exchange rate linked to U.S.-China relations, the quarterly average exchange rates are projected to be 1100 won in Q1, 1100 won in Q2, 1120 won in Q3, and 1140 won in Q4, with an annual average around 1118 won.