[Good Morning Stock Market] US Treasury & China Lianghui 'Shaky KOSPI'... Will Decline Narrow After Falling Start?

[Asia Economy Reporter Lee Seon-ae] On the 4th, the KOSPI is expected to continue its volatile phase. The decline in major indices on the New York Stock Exchange, triggered by the resumption of the rise in U.S. Treasury yields, is likely to weigh on the market. Investors' attention is focused on the opening of the annual largest political event in China, the Two Sessions (National People's Congress and Chinese People's Political Consultative Conference), held on the same day.

◆ Sangyoung Seo, Kiwoom Securities Researcher = The MSCI Korea Index ETF fell 0.29%, and the MSCI Emerging Markets Index ETF fell 0.20%. The 1-month NDF KRW/USD exchange rate is at 1,126.41 won, reflecting a forecasted 5 won rise at the start. The Korean stock market rose the previous day, supported by the Chinese government's assertion that there will be no regulations detrimental to the economy for the time being, easing tightening concerns. Notably, cyclical stocks such as steel showed strength. Meanwhile, the U.S. stock market fell again, with technology stocks and some themes with high valuation burdens selling off due to rising interest rates. The rise in U.S. Treasury yields could ultimately burden foreign investors' supply and demand in emerging markets. Considering this, the Korean stock market is expected to start down about 1.0%, with sectoral differentiation continuing as seen in the U.S. market.

Meanwhile, although the Philadelphia Semiconductor Index fell 3.11%, Micron's (-2.17%) upward revision of quarterly earnings guidance is positive. Micron raised its quarterly sales forecast from $5.6?6.0 billion to $6.2?6.25 billion, and earnings per share from 68?82 cents to 93?98 cents. This is based on tight DRAM supply and lower inventory compared to the previous quarter. Amid the recent increase in semiconductor exports, Micron's upward earnings guidance is expected to positively impact the domestic semiconductor sector. Accordingly, the Korean stock market is expected to narrow losses after an initial decline as rebound buying flows in.

◆ Janghyeok Na & Kyuhee Lee, Hana Financial Investment Researchers = In March, alongside the rise in long-term bond yields, high market interest is expected in major monetary policy meetings starting with the European Central Bank (ECB) on the 11th, followed by the Federal Open Market Committee (FOMC) and Bank of Canada (BOC) on the 18th, and the Bank of Japan (BOJ) on the 19th. The Federal Reserve (Fed) is likely to seek stabilization of long-term bond yields through one of two measures. First, maintaining the current quantitative easing (QE) policy, citing that despite improved economic outlook, inflationary pressures are temporary and far from long-term targets. Second, mentioning the possibility of additional measures such as Operation Twist, which reduces short-term bonds and increases long-term bond purchases, or yield curve control (YCC), which could involve unlimited purchases of long-term bonds at certain levels. However, if the first option is chosen, market participants may express disappointment through supply and demand dynamics, as seen in January.

To find an answer, attention should be paid to Richmond Fed President Thomas Barkin (voting member), a centrist, who stated in March, "Considering the positive economic outlook, rising bond yields will not constrain the economy," and "Vaccine distribution, pent-up demand, high savings, and additional government stimulus will drive a strong spring and summer economy, but inflation will not reach problematic levels." Also, the massive liquidity in the market is accompanied by sharp rises in commodity prices and long-term bond yields, which could potentially limit economic recovery through increased corporate financing costs and reduced real income (household purchasing power). These concerns should be partially considered.

In conclusion, the Fed is likely to choose the first option, and asset market participants are expected to remain sensitive to commodity prices, inflation-related economic indicators, and long-term bond yield trends for the time being. Therefore, Hana Financial Investment has decided to maintain a neutral view on major asset classes in March. Additionally, based on expectations of stronger economic recovery after Q2, it recommends a first-stage overweight strategy on domestic and investment-grade credits and commodities, which have relatively low valuation burdens.

◆ Sanghyun Park, Hi Investment & Securities Researcher = What cards might the Fed play at the March FOMC meeting to stabilize long-term yields? Despite concerns about economic uncertainty at the January FOMC meeting, the first quarter growth rate is likely to be strong, and the second quarter is expected to continue strong growth due to an additional $1.9 trillion stimulus and expanded vaccine rollout. The vaccine rollout trend may accelerate faster than initially expected, potentially advancing the entry into the vaccine economy. The Biden administration announced an increase in weekly vaccine supply from 14.5 million doses to 15.2 million doses, with 2.8 million doses of the J&J vaccine also to be distributed, expecting weekly vaccine supply to reach 18 million doses soon. Accordingly, the originally scheduled 600 million doses by the end of July could be secured by May, about two months earlier, making early entry into the vaccine economy and mobility expansion-driven economic momentum visible in Q2. This atmosphere is expected to deepen the Fed's dilemma. The stronger-than-expected growth and accompanying rapid rise in yields could trigger instability in economic recovery or asset markets. Therefore, the Fed's concern about measures to curb further sharp rises in long-term yields will inevitably increase.

Regarding this, what cards the Fed will present at the FOMC meeting on the 16th?17th to stabilize long-term yields will be an important variable for the economy and financial markets. Realistic options at this point include verbal guidance. The Fed may not take immediate yield stabilization measures but signal additional long-term bond purchases to the market to induce yield stabilization. However, considering the rapid pace of U.S. economic recovery, the Fed may present additional long-term Treasury purchase options. These include the already-discussed Operation Twist (OT), which involves buying long-term Treasuries and selling short-term Treasuries, or reducing monthly mortgage-backed securities (MBS) purchases while increasing Treasury purchases within the $120 billion monthly bond purchase program ($80 billion Treasuries, $40 billion MBS). Additionally, the long-discussed immediate implementation of yield curve control (YCC) could be considered. Given the stronger growth and faster vaccine rollout than expected at the January FOMC meeting, the Fed's dilemma over interest rate policy has deepened, making the March FOMC meeting's content or outcome a significant variable for financial markets and the economy.

◆ Ingeum Park, Jaeyoung Jang, Chulgun Jo & Younghwan Kim, NH Investment & Securities Researchers = The average GDP growth target for 2021 set by 31 provincial governments in China is about 7.5%. The core areas are technological innovation and advanced manufacturing, with an increased emphasis on consumption compared to 2020. After the Two Sessions, the final outline of the 14th Five-Year Plan will be announced through Xinhua News Agency. Key development directions include technological independence, industrial upgrading, and consumption promotion. Specific growth targets in areas such as livelihood, resources, and environment will also be presented.

Since Chinese President Xi Jinping declared "China's carbon neutrality before 2060," China's decarbonization efforts have intensified. During the 14th Five-Year Plan period, solar and wind installations are expected to increase significantly, alongside the full-scale development of the ESS and hydrogen markets. Investment will increase due to manufacturing recovery, technological innovation, and advanced manufacturing support policies, leading to increased demand for industrial robots. Supported by consumption promotion policies, sales of eco-friendly vehicles in China are likely to continue rising. In particular, mid- to long-term benefits are expected for parts, secondary battery, materials, and raw material companies benefiting from increased sales of eco-friendly vehicles domestically and overseas.

From the perspective of Korean stocks, the policy to expand renewable energy is noteworthy, especially in the solar power sector. Although Korean companies may not directly benefit from the expansion of solar installations in China, they can receive indirect benefits in markets outside China. As the solar power generation equipment market grows, competition for orders may ease. Benefits are expected for domestic solar companies expanding their portfolios into high value-added areas such as EPC (Engineering, Procurement, and Construction) and VPP (Virtual Power Plant), along with cells and modules.