[Good Morning Stock Market] Dovish Fed Promising Patience... KOSPI Battle Continues at Resistance Level

[Asia Economy Reporter Lee Seon-ae] The domestic stock market is expected to take time to explore its direction. The tension and volatility surrounding the timing of tapering (asset purchase reduction, tightening) suggest that expectations for stock market gains need to be slightly lowered.

[Image source=Yonhap News]

◆ New York Stock Market Falls Despite Fed's Continued Easing Stance

The New York stock market fell despite the U.S. central bank, the Federal Reserve (Fed), maintaining an easing stance. Although the Fed adopted a dovish (monetary easing preference) mode and lifted the market, it is interpreted that the market faltered following Chairman Jerome Powell's bubble remarks near the end of the session.

On the 28th (U.S. Eastern Time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 33,820.38, down 164.55 points (0.48%) from the previous session. The Standard & Poor's (S&P) 500 index fell 3.54 points (0.08%) to 4,183.18, and the tech-heavy Nasdaq index dropped 39.19 points (0.28%) to 14,051.03.

The market focused on the Fed's monetary policy decision during the session. As expected, the Fed decided at this month's Federal Open Market Committee (FOMC) meeting to keep the benchmark federal funds rate (FFR) at the zero level of 0.00-0.25%. It also decided to maintain quantitative easing (QE) by purchasing $120 billion in bonds monthly. Chairman Powell said at the press conference that it would take some time to achieve the Fed's goals and that it was not yet time to start discussions on tapering asset purchases.

U.S. long-term Treasury yields fell after Powell's remarks. The 10-year Treasury yield plunged after 2:30 p.m. on the day of his remarks, dropping to as low as 1.608% during the session.

However, some view the Fed's upgraded economic assessment as signaling the first step toward tapering. The Fed added the phrase "economic activity and employment indicators have strengthened due to expanded vaccinations and accommodative policies" in this month's FOMC monetary policy statement.

Powell also diagnosed that "some asset prices are at high levels" and "there seems to be some bubble," and after his remarks, the S&P index, which had turned upward, fell again.

New York market experts expect the market to explore its direction until major earnings reports are confirmed. Jon Paulson, Chief Investment Strategist at Roitholt Group, told CNBC, "Many FAANG (Facebook, Apple, Amazon, Netflix, Google) companies will report earnings this week," adding, "The stock market will likely wait until some of these major companies' earnings reports come out before deciding the next market direction."

◆ Jeong In-ji, Yuanta Securities Researcher

After the KOSPI attempted to break through the 3,200 level on the 20th and went through a short-term correction, it rose again but was limited at around 3,220. The previous high range from January, located between 3,200 and 3,260, is expected to be a very strong resistance zone. Therefore, the recent failure to surpass this resistance level appears to be a natural phenomenon.

When resistance at the previous high is strong and buying pressure is weak, the market tends to widen its decline near the previous high. However, recently, after failing to break through the January high resistance on the 20th, the correction was limited, and attempts to rise continued, indicating that while resistance is strong, buying pressure is not very weak.

In particular, after recovering the 60-day moving average in early April, the price has consistently stayed above this moving average, which has turned upward. With the medium-term moving averages aligned in a bullish formation, even if the market turns bearish again, conditions are set for renewed attempts to rise.

Therefore, it is judged that the market is likely to continue a directionless trend for the time being. If a correction phase proceeds, levels around 3,150 or 3,100 will serve as important short-term support. Ultimately, only if the price falls below the 60-day moving average and this moving average is confirmed as resistance can it be considered that the market has entered a mid- to long-term correction phase.

◆ Kim Kyung-hoon, KTB Investment & Securities Researcher

Overall, a very favorable view is maintained for the stock market. Starting with Canada's tapering recently, market concerns about tightening are premature, and from this perspective, a long-term rally in value stocks is expected until the second half of next year.

However, looking only at this year, the short-term view is slightly different. Through previously published materials, it has been communicated that the reflation phase will end around late March or April this year. Among macro variables, commodity prices play a central role. The sharp rise in commodity prices starting from April last year, combined with the decline in U.S. commodity consumption since October last year, suggests that due to the typical five-month lag in the commodity cycle, this effect will begin to be reflected from late March or April this year.

Commodity prices are considered to correlate more with emerging markets than with the U.S. from a stock market perspective. This implies a shift from emerging market dominance to U.S. dominance around late March or April. Generally, commodity prices have an inverse relationship with the dollar and tend to move in tandem with market interest rates. This pattern ultimately means that from late March or April, amid dollar strength, the domestic market will favor small- and mid-cap stocks, and for the U.S. market, the stabilization of rising market interest rates will lead to a resumption of rallies centered on large growth stocks, which had been suppressed by rising rates since the beginning of the year.

In the short term this year, a rebound in commodity prices is expected again around September, so a rally centered on small- and mid-cap stocks is anticipated until the third quarter (September), followed by a sustained large-cap value stock market until the second half of next year.

The upside of this liquidity rally, which began last year, still remains above 25% even after one year. Therefore, based on the U.S. S&P 500, which serves as a barometer for global stock markets, there is no need to worry about bubbles or risk premium reductions until reaching 4,900 points.

In the short term until September this year, small- and mid-cap stocks are favored, and thereafter, supported by continuous improvement in lagging indicators, large financial, IT, and cyclical consumer value stocks are viewed positively in the long term.