[Good Morning Stock Market] US Stock Market Stabilizes Despite Delta Variant Spread... Positive Signals for Domestic Market

Risk Asset Preference Highlighted... Expectation of Improved Foreign Investor Demand Up

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Minwoo Lee] Despite the spread of the COVID-19 Delta variant, the U.S. stock market closed slightly higher, recovering from recent declines amid news of increased airline bookings in the U.S. Strong corporate earnings also had a positive impact. As international oil prices and government bond yields rose, risk asset preference appeared to increase. Attention is focused on whether foreign demand will improve in the domestic stock market as well.

On the 21st (local time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 34,798.00, up 0.83% from the previous session. The S&P 500 index rose 0.82% to 4,358.69, and the tech-heavy Nasdaq index closed at 14,631.95, up 0.92% from the previous session.

◆ Sangyoung Seo, Researcher at Mirae Asset Securities = Recently, concerns about economic slowdown due to the COVID-19 Delta variant have heightened risk aversion, causing U.S. government bond yields to fall and increasing preference for safe assets. Volatility tended to expand across financial markets. However, as it became clear that there would be no full lockdowns like last year despite the spread of COVID-19, these risks eased. Meanwhile, the market appears to be shifting to an earnings-driven phase.

The International Monetary Fund (IMF)'s growth rate announcement also acted as a positive factor. Kristalina Georgieva, IMF Managing Director, stated that despite the spread of COVID-19, the world growth rate of 6.0%, which was revised upward in April, will be maintained. While emerging markets may experience slower economic recovery due to insufficient vaccination and the spread of the Delta variant, she argued that it is not yet a level of concern. Additionally, U.S. airline United Airlines reported better-than-expected earnings, which was also positive. They claimed that bookings have surged fourfold compared to the previous year and that this trend is expected to continue. Following the strength in travel and leisure sectors, government bond yields rose amid easing economic concerns, and financial stocks also showed clear strength.

International oil prices surged more than 4% despite an increase in crude oil inventories. This appears to be influenced by high expectations for increased gasoline demand due to rising travel. The surge in energy demand due to heatwaves in countries worldwide, including the U.S. and China, is also interpreted as a background for the rise.

The domestic stock market is also expected to be influenced by the recovery of the U.S. stock market. It is favorable that major institutions still maintain their economic growth forecasts, government bond yields and international oil prices are rising, and risk asset preference is highlighted as the dollar, yen, and gold weaken. Considering that the Philadelphia Semiconductor Index rose 3.06% and the Russell 2000 Index also showed a 1.81% gain, expectations for improved foreign demand have increased.

◆ Yumi Kim, Economist at Kiwoom Securities = Since the U.S. economic improvement trend remains valid, the financial market is unlikely to contract sharply. In the past, when concerns about the economy caused government bond yields to fall sharply, the U.S. credit spread also widened rapidly. However, recently, despite the 10-year U.S. Treasury yield falling below 1.20% during the week, the credit spread only rose slightly, showing a relatively stable trend.

Credit spreads are generally considered indicators of the soundness of the U.S. economy and the financial health of companies. When credit spreads remain stable, it implies abundant liquidity in the financial market and low concerns about credit tightening, as well as that negative views on economic or indicator weaknesses have not spread throughout the credit market. The recent concerns about economic slowdown can be seen as a process of adjusting expectations that had risen too quickly compared to the pace of indicator recovery.

The current period can be viewed as a momentum gap where the effects of government policies implemented earlier this year are weakening. Initially, it was expected that this phase would be somewhat offset by pent-up demand from vaccine distribution and economic reopening, but the Delta variant has recently increased the likelihood of delayed recovery in demand related to economic reopening. However, despite the Delta variant, vaccine distribution is ongoing, and the fatality rate is low, making it unlikely that economic activities will be strongly restricted as before. This means that demand recovery and indicator improvement related to vaccine distribution can continue.

From the employment perspective, if temporary constraints such as additional unemployment benefits ease and the strength of improvement increases, the outlook on the economy could turn positive again.