[Good Morning Stock Market] 'Relief Rally' Expected to Boost KOSPI... Profit-Taking Pressure Remains

[Asia Economy Reporter Lee Seon-ae] The Korean stock market is expected to continue its upward trend on the 7th, but the extent of the rise is likely to be limited.

A positive factor is the New York stock market's rebound after shaking off concerns about the Omicron variant. On the 6th (local time), the Dow Jones Industrial Average, a blue-chip club, closed at 35,227.03, up 646.95 points (1.87%) from the previous trading day. The large-cap-focused Standard & Poor's (S&P 500) index ended the day at 4,591.67, up 53.24 points (1.17%). The tech-heavy Nasdaq Composite Index closed at 15,225.15, up 139.68 points (0.93%).

The market was driven by expectations that Omicron would not cause as severe a shock as initially feared. Dr. Anthony Fauci, the White House's chief medical advisor, said about the Omicron variant, "It has strong transmissibility in South Africa," but added, "It is too early to make any definitive statements about this, but so far it does not seem to be that serious." There were also reports that the U.S. Food and Drug Administration (FDA) is discussing streamlining the approval process for vaccines specifically targeting Omicron.

However, investors are concerned that the Federal Reserve (Fed) will expand the scale of its asset purchase tapering at the upcoming Federal Open Market Committee (FOMC) meeting next week. A faster tapering pace could bring forward the timing of interest rate hikes. The Wall Street Journal reported that the Fed is expected to accelerate tapering and plan to end asset purchases by March next year.

Concerns over China's Evergrande (恒大·Ebeogeuraendeu) real estate crisis did not significantly affect the U.S. market. In particular, investor anxiety eased as Chinese local governments dispatched working groups to Evergrande, and the People's Bank of China unexpectedly cut the reserve requirement ratio.

◆ Seo Sang-young, Researcher at Mirae Asset Securities = The Korean stock market turned to an upward trend after falling more than 1% at one point due to increased volatility in the U.S. stock market last Friday, supported by foreign investors' net buying of futures.

Especially, on Sunday, when Dr. Fauci expressed optimism in an initial report on the Omicron variant, easing related concerns, the rise in U.S. after-hours futures positively influenced overall investor sentiment. The U.S. stock market showed strength with travel, leisure, and airline sectors surging following the report, along with the People's Bank of China's reserve requirement ratio cut and improvements in employment trend indices, which are positive factors for the Korean stock market. However, considering the possibility of a hawkish Fed stance due to improved U.S. employment trend indices and the fact that the Omicron issue, a decisive factor for the U.S. stock market rise, has already been priced in, the extent of the rise is expected to be limited. Taking this into account, the Korean stock market is expected to start with a rise of around 0.5%, followed by a process of digesting selling pressure through China's import-export trends and the outcome of Australia's monetary policy meeting.

◆ Han Ji-young, Researcher at Kiwoom Securities = Omicron cases are increasing worldwide, and although sufficient information on fatality rates and related data is not yet available, the prevailing view is that its severity will not be as great as the initial COVID-19 or Delta variant. Unlike the early days when no vaccines existed, humanity now has vaccines and treatments. With the likelihood of full lockdown measures decreasing, our firm maintains the existing forecast that Omicron's economic and stock market impact will be limited.

Starting this week until the December FOMC, the Fed enters a blackout period during which Fed officials are prohibited from speaking, increasing uncertainty from the Fed. The inability to hear opinions from Fed Chair Powell and other officials amid emerging Omicron-related information is a burden. For most market participants who had been preparing for accelerated tapering since the November FOMC, the emergence of this variant caused short-term policy confusion.

However, unless Omicron further worsens supply shortages or hampers economic and employment recovery, the Fed is likely to proceed with monetary policy changes as planned. In other words, the recent Fed stance cannot be considered excessively hawkish, and excessive anxiety about tapering acceleration should be avoided. Although the default risk of China's Evergrande Group is becoming visible, attention should be paid to the Chinese government's strong intention to minimize the fallout from these defaults, such as the People's Bank of China's 50 basis point reserve requirement ratio cut. The Evergrande default concerns, which have been at the center of negative sentiment for some time, are expected to be perceived as fading factors in the stock market going forward.

On this day, the Korean stock market is expected to show an upward trend, supported by positive factors from the U.S. and China. Considering that the KOSPI has risen consecutively during the last four trading days when global markets were under correction, there is short-term profit-taking pressure. However, given the positive changes in global major investment banks' views on the semiconductor industry, growing expectations for resolving the excessive underperformance compared to major countries' stock markets since the second half of the year, and favorable won-dollar exchange rate forecasts, increasing weights in large-cap stocks including the electrical and electronics sector is considered valid.