[Good Morning Stock Market] "Resolution of Major Countries' Tightening Policy Uncertainty, Is a Santa Rally Possible?"

Nasdaq Drops Over 2% Amid Tightening Concerns and Simultaneous Futures and Options Expiry
Domestic Market Expected to Rise Led by Large Caps Amid Growth Stock Pressure

"Major Central Bank Policy Meetings Conclude, Santa Rally Expectations Rise"

[Image source=Yonhap News]

[Asia Economy Reporter Minji Lee] With the policy meetings of major central banks in the US and Europe concluded, there is a forecast that although short-term stock market volatility may increase, the uncertainty has been resolved, paving the way for a 'Santa Rally'?a year-end rise in stock prices.

Ji-young Han, Kiwoom Securities Analyst: “Nasdaq Declines After ECB and BOE Policy Meetings... Domestic Stock Market Burdened”

The US stock market showed weakness mainly in major tech stocks as concerns about the tightening shift by major central banks, including the European Central Bank (ECB) raising inflation forecasts and the Bank of England (BOE) raising interest rates, were reflected. The ECB held interest rates steady and announced it would end its COVID bond purchase program in March next year, while the BOE raised its benchmark interest rate from 0.1% to 0.25%.

Tech stocks appeared to struggle temporarily as they digested the policy meetings of the three major central banks over two days, including the previous day's FOMC. The increased volatility in supply and demand ahead of the US futures and options simultaneous expiration day, coupled with Adobe's roughly 10% plunge due to earnings and guidance falling short of expectations, further intensified selling pressure on tech stocks. On that day, the Nasdaq index fell 2.5%, while the S&P 500 and Dow Jones indices declined by 0.1% and 0.9%, respectively.

Considering the stances of the BOE and ECB, major central banks are moving to address high inflation regardless of employment market conditions or the impact of Omicron. While the December FOMC was less hawkish than the market feared, the imminent interest rate hikes are now a foregone conclusion. There is also a view that Fed Chair Powell's changed perspective on the post-COVID employment market suggests tighter monetary policy than expected next year.

Accordingly, although the sharp decline in growth stocks like the US Nasdaq may weigh on the domestic stock market, it is expected to show a robust price trend centered on large-cap stocks with improving earnings expectations and supply-demand conditions. Considering that the US stock market decline was partly influenced by increased volatility due to the simultaneous futures and options expiration, the impact on the domestic market is estimated to be limited. However, with less than two weeks remaining until the domestic stock market closes for the year, there is a need to keep open the possibility of temporary selling pressure from major shareholders aiming to avoid capital gains tax, especially among leading thematic stocks.

Jungwon Kim, Hyundai Motor Securities Analyst: “Expected FOMC, Anticipation of Santa Rally”

The resolution of market uncertainty following the expected December FOMC meeting results is raising expectations for a Santa Rally in the KOSPI at year-end. Although the hawkish Fed stance clearly signals the start of an interest rate hike cycle, the resolution of FOMC uncertainty is expected to have a positive effect on the stock market for the time being.

South Korea has proactively implemented two prior interest rate hikes, so the impact of the tapering acceleration decision is expected to be limited. Additionally, in the second half of the year, the KOSPI has seen valuation pressures ease amid inflation concerns and the Fed's asset purchase reduction phase, so the Fed's decision is expected to have relatively less impact.

Another factor supporting expectations for a Santa Rally is the potential easing of inflation starting in the first half of next year. The US has announced the release of 18 million barrels from its strategic petroleum reserve to counter energy-driven inflationary pressures, and logistics bottlenecks are believed to be entering a relief phase. Fed Chair Powell also mentioned that the sharp rise in inflation was mainly due to pandemic-related supply chain disruptions, which are expected to be resolved soon. Since the KOSPI's weakness in the second half was due to the domestic market's vulnerability to inflation, a slowdown in inflation is predicted to enhance the attractiveness of the domestic stock market.