[Good Morning Stock Market] Intersection of Worry and Expectation... Short-Term Downward Pressure Due to Wait-and-See Sentiment

[Image source=Yonhap News]

[Asia Economy Reporter Lee Seon-ae] The U.S. New York stock market closed mixed. On the 7th (local time) at the New York Stock Exchange, the Dow Jones Industrial Average fell 0.36% from the previous trading day to close at 34,630.24. The Standard & Poor's (S&P) 500 index closed down 0.08% at 4,226.52. The tech-heavy Nasdaq index rose 0.49% to 13,881.72, and the small-cap focused Russell 2000 index gained 1.43% to 2,319.18. The market showed a mixed trend characterized by profit-taking due to high price concerns and cautious investor sentiment. In particular, there was a strong wait-and-see mood ahead of the May Consumer Price Index (CPI) announcement scheduled for the 10th. The market consensus compiled by The Wall Street Journal (WSJ) expects a 4.7% increase year-over-year.

On Wall Street, there is growing speculation that discussions on tapering (reducing bond purchases) will begin as early as the Federal Open Market Committee (FOMC) regular meeting this month. CNBC reported, "The Fed is in the initial stage of preparing the financial markets for tapering," and "tapering is expected to be discussed at next week's FOMC regular meeting." Although some market participants speculated that tapering might be delayed due to May's new employment figures falling short of expectations, it is expected to start as planned around summer.

The timing for reducing the asset purchase program, which amounts to $120 billion per month, is expected to be late this year or early next year. However, Wall Street is already concerned that the implementation of the Fed's tightening policy could cause significant shocks to the financial markets, especially the bond market. There are concerns that the so-called financial market "spasm" phenomenon, which occurred after the Fed mentioned tapering in 2013, could reoccur.

◆ Han Ji-young, Kiwoom Securities Researcher = On the 7th, the KOSPI started higher, supported by relief from U.S. employment data, with large-cap stocks such as automobiles leading the gains, surpassing the 3,260 level during the session. Although it turned lower due to cautious sentiment over U.S. consumer prices and weak May export-import figures from China, it rebounded again in the latter half of the session, driven by increased net buying from institutional investors such as financial investment firms and a sharp rise in nuclear power-related sectors, closing at a record high of 3,252.12.

On the 8th, the Korean stock market is expected to open under downward pressure due to uncertainty surrounding the U.S. consumer price announcement and increased profit-taking from short-term level concerns. The fact that China's May export-import growth rate, a major export destination for Korea, was favorable, and that major large-cap stocks such as semiconductors and automobiles, which had been sluggish for some time, appear to be bottoming out, can be seen as positive factors for the overall Korean stock market. However, since there is the burden of digesting major macro events this week, the index's direction is expected to stagnate in the short term. Additionally, attention should be paid to the price volatility of certain theme stocks (such as nuclear power) that have recently surged, similar to the U.S.

◆ Lee Jae-sun, Hana Financial Investment Researcher = South Korea's vaccination rate is accelerating. The first-dose vaccination rate rose from 7% at the end of May to 14% currently, and the second-dose rate has entered the 4% range. Of course, the vaccination rate is still slower compared to leading countries. The U.S. and the U.K. have recorded high vaccination rates of 51% and 58%, respectively, for the first dose. Simply calculated, it will take about three more months for South Korea to catch up with the vaccine distribution speed of those countries. However, the period when expectations for economic normalization can be fully highlighted is not far off. The government has stated that if the vaccination rate reaches 25% by the end of June, social distancing measures can be eased compared to the current level. Considering the U.S. and U.K. cases, the 25% target is not an impossible scenario. Both countries took about a month to reach from 14% to 25%.

Currently, the expectation for overseas demand normalization is greater than domestic demand normalization. Unlike February to March, the possibility of herd immunity in major countries is gradually increasing, and population mobility is actively observed. In the U.S. and the U.K., population mobility has already surpassed pre-COVID-19 levels.

In particular, demand for travel is gradually increasing (automobiles, airlines). As population mobility increases, citizens' demand for 'travel' is also rising. Recently, travel-related stocks such as automobiles and airlines have shown relative strength in a rotation market. According to surveys, U.S. citizens plan road trips by car and domestic and international flights within six months. Although a trend reversal in earnings estimates for these sectors has not yet been observed, travel-related stocks have high correlations between countries, and overseas sales are an important factor for automobiles. Therefore, as herd immunity approaches in developed countries, it is time to pay attention to the potential for a trend improvement in earnings in these industries.

◆ Park Sang-hyun, Hi Investment & Securities Researcher = The supply chain and logistics disruptions in major Asian production hubs caused by the spread of COVID-19 are clearly short-term negative factors for the Asian economy. In particular, disruptions in China's export-import logistics network could have significant adverse effects not only on China but also on domestic and global trade and manufacturing business cycles. For South Korea, which has a high proportion of exports and imports with China, supply chain and logistics disruptions in China could act as short-term negative factors for domestic export conditions. There is a possibility that the China supply chain risk will be reflected in domestic exports in June or July.

However, the supply chain disruptions in Asia caused by COVID-19 are still likely to be short-term negative factors, and rather, they could stimulate inventory replenishment demand in the second half of the year, so excessive concerns should be avoided. The recent rebound in Chinese stock markets due to foreign buying also reflects that financial markets are not yet overly worried about Asian supply chain disruptions. Although supply chain and logistics disruptions caused by COVID-19 may increase volatility in the global manufacturing and export cycles, they are not factors that undermine the overall upward trend.

◆ Cho Byung-hyun, Yuanta Securities Researcher = A recent survey of export companies revealed negative outlooks for exports in the second half of the year. According to a survey by the Korea Economic Research Institute, 55.2% of companies in 12 major export industries presented a negative export outlook for the second half. Concerns about a slowdown in export recovery and polarization among industries should be noted.

Although South Korea's vaccination started late, it has recently been progressing at a considerable pace. The number of vaccinated people in South Korea is about 7.6 million based on the same criteria as the U.S., with a vaccination rate of 14.8%. At the government's '3rd Special COVID-19 Response and Prevention Meeting' held on the 7th, it was forecasted that the first half vaccination target of 13 to 14 million people could be achieved, and the goal is to vaccinate 36 million people, or 70% of the entire population, by the third quarter. This suggests that vaccination rates are expected to increase faster than before.

Looking at the U.S. case, stocks with a reopening concept, such as airlines, showed strong upward trends as vaccination rates accelerated. In South Korea, vaccination rates are also accelerating recently, and if the government's plan proceeds as expected, acceleration is likely to continue. Furthermore, considering the vaccine distribution in major economic zones and increasing attempts to open borders such as travel passes, interest in reopening concepts is likely to remain valid for some time.