[Good Morning Stock Market] "The decline was excessive"... US Stock Market Rebounds Amid FOMC Aftershocks

US Fed Officials' Dovish Remarks Raise Hopes for Rally
Possible Rebound in Korean Stock Market...Focus on Cyclical Stocks

[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] The U.S. stock market appears to be rebounding as it digests the somewhat more hawkish-than-expected Federal Open Market Committee (FOMC) results. Buying momentum flowed in amid perceptions that the late last week’s stock decline was excessive, and the market closed higher supported by calming remarks from New York Federal Reserve Bank presidents. The domestic stock market is also expected to show strength in sectors related to those that rose in the U.S. market, such as financials, industrials, and energy.

On the 21st (local time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 33,876.97, up 1.76% from the previous day. The S&P 500 rose 1.40% to 4,224.79, and the tech-heavy Nasdaq Composite ended the session at 14,141.48, up 0.79%.

◆ Sangyoung Seo, Researcher at Mirae Asset Securities = The U.S. stock market started higher, supported by some easing of concerns over economic slowdown. Notably, the shift to gains was driven by remarks from Federal Reserve (Fed) officials expressing confidence in the economy, which positively influenced the market. Dallas Fed President Kaplan stated, "This year’s growth rate will improve to 6.5%, inflation to 3.4%, and unemployment to 4%." These figures are either in line with or better than the Fed’s projections this month. Although President Kaplan argued for an early start to tapering (reducing asset purchases), the market seems to be focusing more on economic improvement than on tapering.

James Bullard, President of the St. Louis Fed, also mentioned, "The economy is in a stronger position than at the beginning of the year, so preparations for tapering should be made," but he added, "Considering uncertainties in the labor market, it will take time to prepare the tapering process," which somewhat eased immediate tapering concerns. This also contributed to the market’s rebound. New York Fed President John Williams stated that inflation could exceed 3% this year but is expected to return to 2% next year, suggesting that stimulus measures will not be reduced soon. Christine Lagarde, President of the European Central Bank (ECB), also indicated a more moderate monetary policy stance compared to the Fed, saying, "The Eurozone is clearly in a different situation regarding inflation outlook than the U.S."

These remarks helped alleviate concerns about economic slowdown that had persisted since the weekend, stimulating risk asset preference. The U.S. 10-year Treasury yield, which had fallen below 1.4% at one point, rose above 1.49%. International crude oil prices surged, and commodity futures markets showed strength, with cyclical sectors such as financials, industrials, and energy, as well as tech stocks, demonstrating solid performance.

This influence is expected to positively impact the domestic stock market as well. However, some semiconductor-related stocks are showing weakness, and growth stocks are relatively sluggish, so the overall rise in the domestic market is expected to be limited. Nevertheless, stocks related to sectors that rose in the U.S. market, such as financials, industrials, and energy, are expected to maintain strength ahead of Federal Reserve Chair Jerome Powell’s congressional testimony.

◆ Jiyoung Han, Researcher at Kiwoom Securities = Market participants appear to be digesting the aftereffects of the FOMC. Although some Fed officials’ shifts in stance following the sharp rise in core consumer prices in May are a burden, considering the Fed’s tendency to act based on data, it is expected that the Fed will not raise policy rates earlier than the market fears. The recent inflationary pressures are likely to ease after the third quarter, and from the Fed’s dual mandate perspective, full normalization of the labor market still requires time. Of course, with Fed officials’ remarks scheduled throughout this week, uncertainty about their stance changes remains, but there is no need to excessively reduce risk appetite.

The domestic stock market is expected to rebound, supported by eased concerns about an early Fed tightening cycle and expectations for second-quarter earnings buoyed by strong June exports. Attention should be paid to whether cyclical sectors such as materials and industrials, which experienced price corrections earlier this month, will rebound. Also, considering the expected decline in the won-dollar exchange rate due to the easing of dollar strength, foreign investors’ supply and demand, which recently reacted sensitively to exchange rates, are expected to be favorable for the stock market.

Although the cryptocurrency market, including Bitcoin, has experienced consecutive crashes due to the Chinese government’s intensified crackdown on mining farms, the impact on other risk assets such as stocks is expected to be limited, given that cryptocurrencies are ultra-high-risk assets.