[Good Morning Stock Market] Volatility Expands with LG Ensol Debut and Hawkish Powell... Foreign Investor Supply-Demand Variable

[Asia Economy Reporter Lee Seon-ae] On the 27th, the domestic stock market is expected to see increased volatility in supply and demand as LG Energy Solution, considered the largest initial public offering (IPO) in history, debuts on the KOSPI market. Given the overall subdued investor sentiment, a high possibility of sell-offs suggests a downward start. However, it is also anticipated that bargain hunting at lower prices may occur.

The U.S. New York stock market turned bearish on the 26th (local time) following Federal Reserve (Fed) Chairman Jerome Powell’s indication of interest rate hikes. On that day, the Dow Jones Industrial Average closed at 34,168.09, down 129.64 points (0.38%) from the previous session.

The Standard & Poor’s (S&P) 500 index also fell by 6.52 points (0.15%) to 4,349.93, while the tech-heavy Nasdaq index closed up 2.82 points (0.02%) at 13,542.12.

Immediately after the Federal Open Market Committee (FOMC) regular meeting ended, the Dow surged over 500 points but reversed to a decline after Chairman Powell stated in a press conference that "there is considerable room to raise rates without threatening the labor market."

Edward Moya of foreign exchange brokerage OANDA noted in an investor note, as reported by CNBC, that "it became clear immediately after Powell’s press conference that the possibility of more rate hikes had increased." Additionally, the Fed’s announcement of plans to begin balance sheet reduction after starting rate hikes also negatively impacted investor sentiment. This hawkish (monetary tightening-preferred) stance by the Fed pushed the 10-year U.S. Treasury yield up to 1.88%, adding pressure on interest rate-sensitive tech stocks.

◆ Sangyoung Seo, Researcher at Mirae Asset Securities = The rise in the U.S. stock market driven by growing expectations for the earnings season is favorable for the Korean stock market. Furthermore, the semiconductor sector, which had been underperforming, showed strength following the government’s announcement of support measures, which is also positive. Meanwhile, the Fed’s FOMC announcement was less hawkish than the market feared, which is supportive; however, Chairman Powell’s repeated remarks that rate hikes could occur at every meeting and that quantitative tightening could proceed faster than before are burdensome. This is because it negatively affects foreign investor demand.

Despite Tesla’s solid earnings report, concerns about supply chain issues as a future burden led to sell-offs and after-hours declines, highlighting worries about guidance, which is also a negative factor. Considering this, the Korean stock market is likely to see sell-offs due to concerns about the hawkish Fed, with the non-deliverable forward (NDF) USD/KRW exchange rate surpassing 1,203 won and the won weakening, reflecting overall subdued investor sentiment. However, expectations for bargain hunting following recent declines cannot be ruled out, so the market is expected to start lower but may change depending on foreign investor demand.

◆ Jiyoung Han, Researcher at Kiwoom Securities = The January FOMC statement’s indication of a March rate hike and more concrete discussions on subsequent quantitative tightening were already anticipated by the market. However, Chairman Powell’s press conference was more hawkish than expected, causing renewed market confusion. Notably, he mentioned there is considerable room to raise rates without harming the labor market and did not rule out rate hikes at every meeting. He also stated that quantitative tightening should be conducted earlier and faster than before, showing a more hawkish stance compared to his mid-January Senate hearing remarks.

Compared to the 2018 tightening cycle, the environment regarding employment, economy, inflation, and Fed asset size is different, so from the Fed’s perspective, faster policy normalization than before is indeed a burden on the stock market. However, the shock of this policy acceleration has been partially reflected in the market since January, and it is important to note that quantitative tightening will be conducted at a predictable level. This suggests that the Fed will minimize market shocks like the recent tightening spasm through continuous communication with the market. Therefore, with the January FOMC concluded, Fed-related uncertainties are expected to ease for the time being, but uncertainties may expand again during the market’s interpretation process after the January FOMC minutes release (February 16).

The domestic stock market is also expected to face downward pressure influenced by U.S.-originated negative factors. Despite Tesla’s earnings surprise after the U.S. market close, its mention of ongoing supply shortages throughout the year has led to about a 1% decline in after-hours stock price, which is expected to affect investor sentiment toward domestic growth stocks. Furthermore, with LG Energy Solution’s listing on the domestic market, volatility in supply and demand is expected to increase for this stock, secondary battery-related stocks, and large-cap stocks. LG Energy Solution’s inclusion in the KOSPI will be executed on the 28th, so depending on the price movement of this stock on the day, the overall market direction is expected to change according to institutional investors’ supply and demand adjustments aiming to include it in the KOSPI with an estimated weighting range of 3% to 7%.