[Good Morning Stock Market] Russia-Ukraine Conflict Unlikely to Prolong... "KOSPI Expected to Start Higher"

[Image source=Yonhap News]

[Asia Economy Reporter Kwon Jaehee] With the prevailing outlook that the conflict between Russia and Ukraine will not be prolonged, major U.S. indices closed higher across the board. Accordingly, there is optimism that the domestic stock market will also start on an upward trend, although forecasts suggest that volatility expansion is inevitable due to the impact on Korean companies trading with Russia amid financial sanctions against Russia.

◆ Seo Sangyoung, Director at Mirae Asset Securities: "Domestic market expected to start up around 0.5% buoyed by U.S. stock gains... Volatility expansion inevitable"

The U.S. stock market showed volatility early in the session due to ongoing concerns over the Ukraine issue and high inflation fears, but gained momentum for a full-fledged rise following the Federal Reserve's monetary policy report indicating quantitative tightening will proceed by year-end, and news that Russia and Ukraine attempted dialogue. Sectors such as financials and healthcare, which had sharply declined the previous day, as well as industrials, energy, and materials led the gains. The Dow Jones rose 2.51%, Nasdaq increased 1.64%, and the S&P 500 climbed 2.24% that day.

The U.S. market’s strength on hopes for Russia-Ukraine talks is favorable for the Korean stock market. Additionally, the Fed’s monetary policy report suggesting year-end implementation of 'quantitative tightening' with a less hawkish tone is also positive. However, the failure of negotiations between Russia and Ukraine, which had been a factor in Friday’s U.S. market rise, and the commencement of high-intensity sanctions such as blocking Russia from SWIFT by the U.S. and Europe, pose burdens. Notably, blocking Russia from SWIFT will halt remittances, inevitably causing contraction for companies with significant dealings with Russia. Considering this, the domestic market is expected to start with about a 0.5% rise, but export companies and those with factories in Russia may underperform, making volatility expansion unavoidable.

◆ Han Jiyoung, Researcher at Kiwoom Securities: "Korea’s export-import share with Russia below 2%... Limited shock to domestic market"

As indicated by the sharp rise in the U.S. stock market last Friday, market participants seem to strongly expect that the conflict between Russia and Ukraine will not be prolonged and that Western countries such as the U.S., NATO, and the U.N. will not intervene.

From Russia’s perspective, the incentive to prolong the conflict is not strong enough to endure risks such as economic slowdown caused by strong sanctions like SWIFT blocking by Western countries, increased war costs, and worsening domestic public opinion. Even if the conflict ends, prolonged geopolitical tensions and further escalation of Western sanctions could cause raw material prices such as natural gas and wheat to surge again, worsening global inflation. However, considering that the U.S. has not imposed direct sanctions on energy items and that the parties involved in the war have a strong will to end the situation either directly or through mediation, the potential for further inflation increase due to prolonged geopolitical risk is judged to be low. Also, given that Korea’s export and import shares with Russia both fall below 2%, the shock to the domestic market from sanctions on Russia is expected to be limited.