[Good Morning Stock Market] Ukraine and Interest Rate Hike Issues Resurface... "KOSPI Expected to Start Lower"

US Stocks Fall on Renewed Ukraine Concerns
Aggressive Monetary Policy Mentioned... Nasdaq Index Down 2.8%
Negative Impact Expected on Domestic Market

February FOMC Expected to Keep Rates Steady
Fed Uncertainty and Supplementary Budget Issues Pose Risks

[Image source=Yonhap News]

[Asia Economy Reporter Minji Lee] As concerns over Ukraine have resurfaced, leading to a decline in the three major U.S. stock markets, the domestic stock market is also expected to show weakness influenced by these factors. Additionally, after James Bullard, President of the St. Louis Federal Reserve, mentioned the necessity of aggressive monetary policy, the Nasdaq index experienced a drop close to 3%.

Sangyoung Seo, Researcher at Mirae Asset Securities: “KOSPI expected to start down about 1% influenced by U.S. stock market”

On the previous day, the domestic stock market showed a solid performance, rising as much as 1.5% at one point, as the possibility of aggressive monetary policy eased following the release of the Federal Open Market Committee (FOMC) minutes by the Federal Reserve. Positive factors such as active net buying by foreign investors also contributed favorably. However, during the session, geopolitical risks heightened due to shelling by Ukrainian government forces in the Donbas region, increasing market volatility.

In this context, the U.S. stock market’s widened losses on the 17th (local time) due to the Ukraine issue are expected to weigh on the domestic market. Particularly, President Biden’s statement that “a Russian attack is expected within days” and Russia’s expulsion of senior U.S. embassy officials in Moscow, signaling escalating tensions between the U.S. and Russia, have dampened investor sentiment.

Moreover, President Bullard’s mention of even unscheduled meetings and the need for more aggressive rate hikes is also expected to negatively impact investor sentiment. Additionally, the cloud services-related software sector closed broadly lower, leading to expectations that the domestic market will start down about 1%, with investors likely to adopt a wait-and-see stance over the weekend to monitor developments regarding the Ukraine issue rather than taking active measures.

Gyuyun Jeon, Researcher at Hana Financial Investment: “High possibility of 50bp rate hike at March FOMC”

Considering the pace of rising inflation and wages announced after the January FOMC, debates over the size of the rate hike in March are expected to continue for some time. Recently, several regional Federal Reserve presidents such as Harker and Kashkari have advocated for a gradual 25bp increase in March, but those with voting rights this year tend to have a relatively hawkish stance. Notably, President Bullard, who has argued for a 100bp hike in the first half of the year, also holds voting rights.

In the U.S., with the Omicron wave having passed its peak, the economic recovery is expanding while inflation remains high. The Atlanta Federal Reserve’s GDP Now model has already revised the first-quarter growth forecast upward from 0.7% to 1.5%, reflecting strong retail sales and industrial production in January. In conclusion, there is a high likelihood of a 50bp rate hike at the March meeting, with rate increases expected to be concentrated in the first half of the year.

Yeha An, Researcher at Kiwoom Securities: “Unanimous decision expected to keep base rate unchanged at this month’s Monetary Policy Committee”

The Bank of Korea is expected to unanimously keep the base rate at 1.25% at the Monetary Policy Committee meeting on the 24th. Although the base rate will be held steady, the tightening stance is unlikely to be relaxed. This is because the February economic outlook report is expected to revise upward the inflation forecast for this year. The inflation forecast is likely to be adjusted from 2% in November last year to around 2.4%, leaving the door open for additional tightening measures to stabilize inflation.

The timing for additional rate hikes is expected to be in May during the second quarter. Considering the March presidential election and the end of Governor Lee Ju-yeol’s term, it is highly likely that the additional rate hike will coincide with the release of the revised economic outlook in May. The tightening stance is expected to continue, and given the rising inflation trend, policy adjustments are more likely to be advanced to the second quarter rather than postponed to the third quarter.

If the Bank of Korea shifts its focus from financial stability to inflation stabilization, future inflation trends will become a critical factor in policy adjustments. Inflation growth is expected to stabilize somewhat starting in the second half of the year, making further policy adjustments difficult. Accordingly, a pace adjustment is anticipated in the latter half of the year.

However, considering ongoing uncertainties in U.S. Fed monetary policy during the first quarter and domestic supplementary budget issues, increased volatility is inevitable. Geopolitical risk factors surrounding Ukraine may also contribute to heightened volatility.