[Good Morning Stock Market] Should We Fear Tapering?

Hi Investment & Securities "This Tapering Signal Will Not Lead to 2013 Tightening Shock Level"
Yuanta Securities "Interest Rate Decline May Reflect Pessimistic Views on Economic Recovery"

[Image source=AP Yonhap News]

[Asia Economy Reporter Gong Byung-sun] There is a growing outlook that the shock from the U.S. Federal Reserve's (Fed) tapering of asset purchases may not be as severe as expected. This is attributed to the fact that China's economic situation has changed compared to the past. However, some analysts also point out that it is difficult to view the decline in interest rates amid inflation exceeding expectations positively.

On the 11th (local time), the Dow Jones Industrial Average closed at 34,479.60, up 0.04% (13.36 points) from the previous trading day. The S&P 500 index ended the day at 4,247.44, rising 0.19% (8.26 points) from the previous close. The Nasdaq, which is tech-stock focused, recorded 14,069.42, up 0.35% (49.09 points) from the previous trading day.

◆ Park Sang-hyun, researcher at Hi Investment & Securities: The Fed’s tapering signal is now only a matter of time. Depending on inflation and employment market conditions, the timing of the Fed’s tapering signal to the financial market remains flexible, but considering the U.S. economic cycle and the rise in various asset prices, the tapering signal is likely to become visible within this year. There is interest in whether the tightening shock triggered by the tapering announcement in 2013 will be repeated this time.

However, this tapering signal is expected not to reach the level of the tightening shock seen in 2013. Compared to then, there are differences in the global economic cycle, China’s economic risks, the flow of the U.S. dollar, the global trade cycle, and credit risk. In particular, while emerging financial markets such as China suffered significant shocks in 2013, China’s economic situation and policies now show many differences from the past. This is expected to play a role in mitigating the tapering shock.

Attention should be paid more to potential risks that could trigger default risk rather than the simple tapering risk shock. A sustained decline in asset prices such as the stock market can occur if credit risk, i.e., default risk, becomes prominent. At this point, clear credit risks have not yet materialized, but potential credit risks include the spread of negative views on the innovation technology cycle and the full-scale intensification of U.S.-China conflicts.

(Provided by Yuanta Securities)

◆ Jo Byung-hyun, researcher at Yuanta Securities: It is time to consider a defensive perspective. Last week’s U.S. inflation data once again exceeded expectations. Last month, the U.S. Consumer Price Index (CPI) rose 5% year-on-year, higher than the market forecast of 4.7%. Various causes, including the base effect and the rise in used car prices, have been pointed out as reasons for the sharp price increase.

However, despite this inflation rise, the financial market’s reaction has been unusual. In particular, U.S. Treasury yields have fallen further amid soaring inflation, entering the 1.4% range.

Generally, stock market investors tend to be wary only of rising interest rates. However, considering that rising rates reflect expectations of inflation and economic recovery, the opposite phenomenon of falling rates may include a pessimistic view of economic recovery.

If the decline in rates is driven by expectations regarding monetary policy rather than economic recovery, there is room for a different interpretation. But if it is interpreted as a retreat in the previously improving expectations for economic recovery, it is difficult to view this positively. While it is true that rising rates in 2017?2018 increased stock market volatility, it is also worth considering that volatility increased even when both rates and expected inflation fell together.