[Good Morning Stock Market] A Market Dominated by Fear... KOSPI Even at Risk of Falling Below 2700

Rising Inflation Concerns Ahead of US FOMC
Geopolitical Risks from Ukraine Spread
Commodity Prices Surge, Nasdaq Index Falls 2.28%

Domestic COVID-19 New Cases Reach Record High
"To Reverse Market, Negative Factors Must Be Resolved One by One"

[Image source=Yonhap News]

[Asia Economy Reporter Minji Lee] Ahead of the FOMC (Federal Open Market Committee) announcement, geopolitical risks surrounding Ukraine have escalated, causing the U.S. stock market to decline again. The Nasdaq index, representing U.S. technology stocks that had surged sharply the previous day, fell more than 2% in a single day, confirming the weakened investor sentiment. Securities experts predict that with unresolved negative factors such as inflation, interest rates, and war concerns still present, along with ongoing supply-demand gaps, it will be difficult for the KOSPI to show an upward trend today.

Sangyoung Seo, Researcher at Mirae Asset Securities: “Geopolitical risks and inflation concerns highlighted ahead of FOMC”

Geopolitical risks surrounding Ukraine are spreading ahead of the FOMC. Although the possibility of armed conflict between Russia and Western countries seemed to be decreasing, news that the U.S. military is increasing its readiness negatively impacted the stock market. Additionally, bipartisan U.S. senators are reportedly discussing legislation that would allow sanctions even without Russia crossing the Ukraine border, and there are movements urging the UK to prepare for strong sanctions against Russia, further emphasizing the sanctions issue.

This issue could restrict the smooth supply of Russian crude oil, aluminum, and Ukrainian grain. Prices of these commodities could rise further. In fact, as geopolitical concerns grow, commodity prices are increasing. This stimulates inflation and could reinforce the Fed’s hawkish stance at the FOMC.

Jiyoung Han, Researcher at Kiwoom Securities: “FOMC caution, geopolitical concerns, and record-high COVID-19 cases... expected to start lower”

The current resilience of the U.S. stock market is fragile. The Fed’s accelerated tightening and geopolitical risks between Russia and Western countries continue to cause market anxiety. Although Russia and the U.S. have no intention of starting an actual war, investor sentiment has cooled so much that the market is currently pricing in war risks higher than usual. Inflation, the Fed, and war concerns are all tangled, and to reverse market sentiment, these negative factors must be resolved one by one.

The first is the January FOMC. Even if the Fed clearly signals a rate hike in March at this meeting, the market has already priced this in as a given, so the impact is expected to be limited. More importantly, changes in comments regarding the schedule for rate hikes and quantitative tightening within the year, as well as inflation forecasts, are expected to determine market direction. Since the U.S. and major markets including Korea have already reflected all Fed-related negative factors in the stock market plunge after January, if the FOMC results are as expected, it is anticipated that the market will feel relieved.

Domestic stocks are expected to start lower today, influenced by increased volatility in the U.S. stock market and caution ahead of the January FOMC. The fact that new COVID-19 cases in Korea are expected to exceed 10,000 for the first time ever may also worsen investor sentiment during the trading session. However, considering that stocks like IBM (up 5.7%) and American Express (up 8.9%) rose after reporting strong earnings in the U.S., it is analyzed that buying interest will flow into sectors and stocks in Korea with solid earnings expectations.

Kyoungsoo Lee, Researcher at Hana Financial Investment: “Rising interest rates will trigger asset exodus”

If interest rates continue to rise, Korea’s price-to-earnings ratio (PER) is likely to decline gradually. Historically, comparing Korea’s 3-year government bond yield and the KOSPI’s 1-year forward PER from 2008 to the present shows an inverse relationship. Rising interest rates inevitably have a negative impact on foreign and pension fund inflows. Domestic stocks have been used as a hedge against low interest rates.

However, individual investors’ supply is not expected to be a source of support either, as they have already entered at high prices and have little capacity to buy more. When calculating the contribution of individual net buying to index rises, the indicator has been flat this year. The recent slowdown in real estate price increases also negatively affects individual supply. Rising interest rates, which represent the risk-free rate, are causing an exodus from risky assets.

Rising interest rates will negatively affect overheated and overvalued stocks, while creating a favorable environment for undervalued stocks with excessive mid- to long-term price declines. Additionally, if short selling is fully resumed to challenge the MSCI developed market index, high-valuation stocks will inevitably face further corrections. A full resumption of short selling is expected to be considered in the first half of the year, and in such a case, investment considering valuation will be necessary even for small-cap stocks. From this perspective, LG Energy Solution is also expected to face valuation pressure.