[Good Morning Stock Market] US 3 Major Indices Show Strength... Buyback Inflows Despite Tapering Signals

All Three Major US Indexes Show Over 1% Gains
US Treasury Yields Expected to Gradually Rise Around Mid-4th Quarter

[Image source=Yonhap News]

[Asia Economy Reporter Gong Byung-sun] All three major U.S. stock indices rebounded after being shaken by the bankruptcy issue of Chinese real estate company Evergrande Group. Although the U.S. Federal Reserve (Fed) lowered its domestic gross domestic product (GDP) growth forecast and hinted at tapering through the Federal Open Market Committee (FOMC), it is interpreted that a counter-buying momentum has emerged.

On the 23rd (local time), the New York stock market rose across the board. On the New York Stock Exchange that day, the Dow Jones Industrial Average closed at 34,764.82, up 1.48% (506.50 points) from the previous trading day. The S&P 500 index closed at 4,448.98, up 1.21% (53.34 points) from the previous session. The tech-heavy Nasdaq closed at 15,052.24, up 1.04% (155.39 points) from the previous trading day.

◆ Seo Sang-young, researcher at Mirae Asset Securities = The U.S. Fed lowered this year’s GDP growth forecast from 7.0% to 5.9% through the FOMC. Core personal consumption expenditures (PCE) inflation was revised upward from 3.0% to 3.7%. Meanwhile, the Bank of England (BOE) also lowered its Q3 GDP growth forecast from 2.9% announced last month to 2.1% at its monetary policy meeting. The 12-month inflation forecast was maintained at 3.2%, but it is expected to exceed 4% by the end of the year.

Liquidity support reduction issues are also coming to the fore. The U.S. Fed hinted at tapering, and the UK BOE maintained its asset purchase size at ?875 billion (approximately KRW 1,407.1312 trillion), but the decision was not unanimous, passing 7 to 2. Especially amid a slowdown in economic recovery and ongoing high inflation concerns, a reduction in liquidity growth generally acts as a negative factor for the stock market.

However, the stock market still shows strength. This is presumed to be due to counter-buying following this week’s decline. In particular, the ‘buy on dips’ strategy, which has been led by individual investors since the global pandemic, was implemented. In fact, on the 20th, when the market fell about 3% intraday, and again on the 21st, individual investors bought more than $3 billion (approximately KRW 3.522 trillion) worth of stocks in the U.S. stock market.

(Provided by KTB Investment & Securities)

◆ Heo Jeong-in, researcher at KTB Investment & Securities = I expect a gradual rise in U.S. Treasury yields until the end of the year. Only part of the Fed’s tapering impact has been reflected so far, and yields will gradually rise around mid-Q4 when tapering is implemented. However, until that time, yields are expected to fluctuate within a narrow range. This is because valuation burdens on major asset prices remain, and risk-averse factors have not yet been exhausted.

The recent decline in U.S. Treasury yields was driven by a drop in real yields. In particular, declines in the real yield term premium and inflation-linked bond liquidity premium led to the yield drop. The real term premium compensates for uncertainty in interest rate forecasts, and the inflation-linked bond liquidity premium compensates for uncertainty in trading inflation-linked bonds. These premiums tend to fall when market purchases increase under Fed Treasury purchases. After the Fed implemented the fourth round of quantitative easing (QE4) following COVID-19, these premiums fell, causing nominal yields to decline as well.

The key issue is whether low premiums will be maintained after tapering. Since the Fed’s purchase amount will decrease, private sector buying must maintain the low premiums. During the 2013 tapering, after former Fed Chair Ben Bernanke’s tapering remarks, market-driven selling caused premiums to surge sharply, triggering a tantrum (a financial market shock due to a rapid rise in market rates). However, the market began buying again as a consensus emerged that such a level of rate increase could contract the economy. Consequently, yields declined from 2014 to 2016.

The current situation is somewhat different. To maintain low premiums through private sector buying after the Fed’s withdrawal, preconditions such as worsening economic outlook or declines in major asset prices are required. Rather, since market consensus expects yields to be low relative to fundamentals, if the Fed reduces purchases, investor buying sentiment may weaken.

(Provided by Yuanta Securities)

◆ Jo Byung-hyun, researcher at Yuanta Securities = The Evergrande bankruptcy issue is stimulating volatility in financial markets. It is difficult to deny the possibility that this issue could cause a larger ripple effect in the future. However, although it may be an oversimplification, related indicators appear too stable from a phenomenological perspective.

If concerns deepen that Evergrande’s credit issues could spread to systemic risks in China’s financial system, it would be natural for volatility in related indicators such as the Chinese yuan exchange rate or interbank lending rates to increase. However, such signs have not yet appeared.

This may be linked to macroeconomic burdens. The combined share of construction and real estate sectors in China’s nominal GDP was about 14.5% as of last year. If part of the Evergrande crisis reflects the government’s will to improve economic structure, the contraction of these industries could act as a burden on growth rates. Additionally, if real estate prices decline, the drop in asset prices could negatively affect consumer sentiment.