[Good Morning Stock Market] Volatile Market After FOMC... "Low Possibility of Further Decline in Domestic Stock Market"

US Top 3 Stock Markets Reflect Geopolitical Risks and Interest Rate Hike Concerns
Nasdaq Index Down 1.4%...Electric Vehicle and Semiconductor Earnings Slowdown Expected

"FOMC Results Limit Stock Rebound Due to Various Interpretations,
Low Possibility of Further Decline in Domestic Stock Market After Holidays"

[Image source=Yonhap News]

[Asia Economy Reporter Minji Lee] The U.S. stock market closed lower as it digested the results of the January FOMC (Federal Open Market Committee) meeting, amid rising geopolitical risks and concerns over slowing earnings in the semiconductor and electric vehicle sectors. Domestic securities experts predict that while global index rebounds are limited due to various interpretations of interest rate hikes following the FOMC, additional downward pressure on the domestic stock market is expected to be minimal.

Sangyoung Seo, Researcher at Mirae Asset Securities: “Expect easing of supply-demand gap for LG Energy Solution and inflow of bargain hunting in tech stocks”

The U.S. stock market closed lower as it digested the FOMC results amid heightened geopolitical risks stemming from Ukraine. News that the foreign ministers of Russia and China agreed to address recent issues through negotiations highlighted the possibility of escalating friction between Western countries and Russia and China. The Nasdaq index fell 1.4%, while the Dow Jones and S&P 500 indices declined by 0.02% and 0.54%, respectively.

The Nasdaq's decline largely reflected concerns over slowing growth for Tesla and Intel. Despite Tesla’s solid earnings report, the stock plunged 11% after news emerged of delays in launching some products, including electric trucks. Additionally, forecasts that the release of fully autonomous vehicles, mentioned by Elon Musk, could be delayed due to practical challenges intensified growth slowdown concerns. Intel and Lam Research, which issued disappointing guidance, fell 7% and 6.9%, respectively. Consequently, the Philadelphia Semiconductor Index dropped 4.78%. However, Netflix rose 7% due to its appeal as a bargain buy.

Considering that investor sentiment revived for some large tech stocks in the domestic market, bargain hunting is expected to flow in. The supply-demand gap caused by LG Energy Solution is also expected to ease, allowing for a positive start. Although the semiconductor sector underperformed in the U.S. market, this was already reflected in the previous day’s domestic trading, so further declines are unlikely.

Jaeseon Lee, Researcher at Hana Financial Investment: “Limited downside pressure on KOSPI after the holiday, expected range 2580?2690”

Downside pressure on the domestic stock market after the holiday will be limited. The expected KOSPI band is between 2580 and 2690. Currently, psychological fear has peaked following confirmation of the Fed’s hawkish stance. The situation is similar to early 2018 when the Fed raised interest rates four times annually and the U.S.-China trade conflict intensified significantly.

One similarity is the excessive panic selling. In 2018, the first wave of panic selling occurred in February. The amount of forced liquidation relative to margin loans rose nearly 50% compared to the previous month, increasing from 3.5 billion KRW to 5 billion KRW on a daily average basis. In January this year, forced liquidation relative to margin loans also increased by about 35%, from 14.8 billion KRW to 19.9 billion KRW. This represents about 70% of the level seen then. In terms of selling sentiment, it is comparable to October 2018, when the second wave of panic selling occurred amid peak U.S.-China trade tensions. At that time, the KOSPI monthly return fell about 13%, and the Relative Strength Index (RSI) dropped to 19 points. Typically, an RSI below 30 points is considered an oversold condition. The current KOSPI January return is -12%, with an RSI of 18.5 points.

The difference from that time is that earnings are not currently declining. In February 2018, the KOSPI closed down 6%, and the operating profit estimate fell 1.8 percentage points from 223 trillion KRW to 210 trillion KRW. Currently, the KOSPI’s operating profit estimate has risen about 4%, from 253 trillion KRW to 256 trillion KRW, showing no downward trend.

The January FOMC meeting reduced uncertainty about monetary policy. However, it did not clearly specify the timing and pace of interest rate hikes or the implementation of quantitative tightening, leading to various interpretations that have acted as a poison to stock prices.

Daishin Securities expects the Fed to end tapering in early March this year. Interest rate hikes are predicted to occur quarterly, based on federal funds futures (FF futures) and the FOMC meeting schedule, with an estimated total of 4.5 rate hikes.

The U.S. stock market is expected to reduce volatility and prepare for a rebound as monetary policy uncertainty is resolved following the FOMC. The simultaneous implementation of interest rate hikes and quantitative tightening is expected to ease the flattening of the yield curve, mitigating the side effects of rate hikes.

In the fourth quarter of last year, 77% of S&P 500 companies reported earnings surprises, supporting future earnings momentum. If the human infrastructure investment bill passes within January, a strong rally is expected, potentially allowing the U.S. stock market to escape the Fed’s shadow before the first rate hike in March.