[Good Morning Stock Market] Powell's Interest Rate Assessment 'In Focus'... Rebound Expected if Buyback Pressure Increases

On the afternoon of the 22nd, the closing prices of the KOSPI, USD/KRW exchange rate, and KOSDAQ index were displayed on the status board in the dealing room of Hana Bank's headquarters in Euljiro, Jung-gu, Seoul. On that day, the KOSPI closed at 3,079.75, down 27.87 points (0.90%) from the previous session. The KOSDAQ closed at 954.29, down 10.82 points (1.12%). [Photo by Yonhap News]

[Asia Economy Reporter Lee Seon-ae] On the 23rd, the domestic stock market is expected to continue its mixed trend following the previous day. However, if buying momentum flows in with anticipation of remarks from Federal Reserve Chair Jerome Powell, a rebound may be sought. On the previous day, the KOSPI closed at 3,079.75, down 27.87 points (0.90%) from the previous trading day. The KOSDAQ ended trading at 954.29, down 10.82 points (1.12%). Pressure from rising interest rates shook the stock market. Lee Kyung-min, a researcher at Daishin Securities, analyzed, "Rising interest rates can lead to valuation burdens and discounts on growth stocks, while declines may raise concerns about economic slowdown, so for the time being, interest rate variables themselves can cause increased volatility."

In the New York stock market, major indices showed mixed trends as technology stocks were hit by rising U.S. Treasury yields. On the 22nd (U.S. time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 31,521.69, up 27.37 points (0.09%) from the previous session. The Standard & Poor's (S&P) 500 index fell 30.21 points (0.77%) to 3,876.50, and the tech-heavy Nasdaq index plunged 341.42 points (2.46%) to close at 13,533.05. The market closely watched Treasury yield trends, key economic indicators, and COVID-19 related news. As yields continued to rise, the stock market, especially technology stocks, faced pressure. Investors are keenly awaiting what diagnosis Chair Powell will provide on rising interest rates during his semiannual monetary policy testimony to the Senate.

Seo Sang-young, Kiwoom Securities Researcher: "Expecting Inflow of Rebound Buying Amid Sector Differentiation"

The MSCI Korea Index ETF fell 2.60%, and the MSCI Emerging Markets Index ETF dropped 2.94%. The 1-month NDF KRW/USD exchange rate stood at 1,112.67 won, reflecting an expected 1 won rise in the KRW/USD rate at the start. The Korean stock market declined the previous day as the People's Bank of China continuously absorbed liquidity after the Lunar New Year, leading to selling pressure. Some estimate that tightening issues, such as the People's Bank of China mentioning rate hikes for deleveraging this summer, weighed on investor sentiment. Meanwhile, the U.S. stock market's weakness due to increased Bitcoin volatility affecting related stocks, rising interest rates, and Treasury Secretary Yellen's tax-related remarks are expected to dampen investor sentiment. Particularly, the Philadelphia Semiconductor Index's 3.77% drop is also a burden.

Meanwhile, the U.S. 10-year Treasury yield rose close to 1.4% amid improved indicators and expectations of additional stimulus but is limited in causing continuous investor sentiment deterioration as investors await Chair Powell's remarks scheduled for the evening of the 23rd. On the 10th, Chair Powell indicated a patient monetary policy to support economic recovery and maintained a long-term low interest rate stance. Since he is expected to maintain this stance during the Senate hearing, expectations for a rebound buying influx are high. Of course, whether the People's Bank of China continues liquidity absorption, which was a factor in the previous day's decline, is also important. Considering this, the Korean stock market is expected to show changes following the People's Bank of China's announcement after 10 a.m., then seek a rebound ahead of market close while anticipating Chair Powell's remarks. Additionally, sector differentiation, as seen in China, the U.S., and Europe the previous day, is expected to continue.

Park Sang-hyun, Hi Investment & Securities Researcher: "KOSPI Rises Amid Rising Interest Rates, Trust Fundamentals"

The U.S. 10-year Treasury yield, which had been taking a breather, has expanded its rise again, raising concerns about rising interest rates. In particular, the market views the 10-year Treasury yield as a primary threshold, currently approaching the 1.5% level, which heightens tension not only in the stock market but across the entire financial market. Regarding interest rate risk, as repeatedly emphasized in our reports, the current risk is more about the speed rather than the level. Considering that the pre-COVID-19 peak for the 10-year Treasury yield was 1.93%, it is somewhat natural for the yield to approach around 1.9% as the U.S. economy normalizes. However, the market may be concerned because the pace of rate increases is relatively faster than the speed of economic normalization.

However, looking at stock and economic indicator trends during rising 10-year Treasury yield phases since 1990, there has been only one instance where stock prices fell during a rising rate phase. That was after the global financial crisis, reflecting the recessionary economic conditions at the time. In the two rising rate phases in the 1990s, the relatively modest stock gains were attributed to the Federal Reserve's monetary policy stance. In the 1993 rate hike phase, the Fed pursued a tightening policy by raising policy rates. In 1996, although there was no rate hike, the policy rate remained high at 5.25%, and the ISM Manufacturing Index was below 50, indicating economic contraction and weak fundamentals. Notably, during the 2016-2018 rate hike phase, the Fed maintained a tightening stance by raising policy rates by 1.75 percentage points, yet stocks rose 36.3%. This suggests that a favorable economic environment overcame the burden of rising rates.

In Korea, except for the 1996 case, the stock market mostly rose during U.S. rate hike phases. However, during the 2016-2018 rate hike phase, the Korean stock market remained flat at 0.7%, influenced by U.S.-China tensions and China's restructuring impact. In summary, there have been almost no cases where rising interest rates triggered sharp stock price corrections. This is because stagflation characterized by hyperinflation and recession, which occurred in the 1970s and 1980s, has not recently occurred. Ultimately, unless stagflation occurs this time, there is a high possibility that stocks and the economy will maintain a favorable trend despite rising rates. Supported by strong stimulus measures and expanded vaccine distribution, the global economy, including the U.S., is likely to show a strong rebound. Although interest rates may rise faster than expected, solid economic fundamentals are expected to absorb much of the shock from rising rates.

Lee Jae-sun, Hana Financial Investment Researcher: "Do Not Fear Rising Interest Rate Phase"

There is no need to fear rising interest rates. The gradual rise in long-term yields reflects the global economic recovery cycle. In fact, since 2016, the U.S. 10-year Treasury yield and KOSPI operating profit estimates have maintained meaningful directional consistency. For example, even if a rate tantrum occurs, operating profit estimates have returned to their original levels. During the rate tantrums in June 2013 and December 2015, the KOSPI operating profit estimates and foreign buying recovered within about four months. Going forward, Korea is still expected to see improved foreign investor-driven demand. KOSPI earnings estimates have maintained a top-tier level among Asian countries alongside Taiwan since 2020, and the semiconductor sector, representing both countries, shows optimistic prospects. However, the relative strength of the Korean IT index compared to MSCI Taiwan IT has returned to mid-2020 levels. It is necessary to consider that foreign capital inflows were relatively sluggish compared to Taiwan during the overheated market in January.

Lee Sang-min, Kakao Pay Securities Researcher: "Inflation Concerns Are Overblown"

Recently, the market's focus has been on interest rates and inflation. Interest rates have risen rapidly, and concerns about inflation are widespread in the market. There is a sharp divide between views that interest rates and inflation have reached their limits and those that they may continue to rise. An additional debate derived from this is whether interest rates and inflation will cause market collapse. Growth stocks have led the market so far, and there is debate that their valuations, elevated by near-zero interest rates, will be hit.

First, it is judged that expectations for economic recovery naturally pushed interest rates higher. Also, rising rates during an economic expansion phase are not considered a factor that would collapse the market. Although large growth stocks declined somewhat during the recent rate rise, gains in cyclicals offset this. This phase is expected to continue. Furthermore, even in 2011, when commodity prices rose, the market ended with reflation rather than collapse. Therefore, inflation concerns are considered excessive. However, rising rates may pose some disadvantage to stocks with high valuations. Yet, this is more likely to narrow the gap between value and growth stocks. We also believe value and cyclicals will be advantageous in the medium term. We judge that inflation will not damage the market and that the current rise in rates is a natural flow due to economic recovery. This is not an issue that would cause the Fed to shift to a tightening policy.