[Good Morning Stock Market] "Stagflation Concerns Overblown... KOSPI Expected to Start Higher"

[Image source=Yonhap News]

[Asia Economy Reporter Hwang Yoon-joo] On the 8th and 9th (local time), the U.S. stock market rose on news of a de-escalation in negotiations between Ukraine and Russia. Despite the U.S. ban on Russian crude oil imports, progress was made in negotiations as Ukraine withdrew its NATO membership demand on the 8th and expressed openness to national neutrality on the 9th. With the easing of geopolitical risks, the sharp rise in oil prices subsided, and concerns about stagflation also somewhat eased. On the 9th, the Dow Jones Industrial Average closed up +2.00%, the Standard & Poor's (S&P) 500 index +2.57%, and the Nasdaq +3.59%.

Han Ji-young, Kiwoom Securities Researcher: "The Ukraine situation is becoming a constant... Domestic stock market expected to strengthen"

As time passes, the Ukraine situation is expected to become a constant rather than a variable. Market participants are reflecting expectations in stock prices that the situation will not worsen further at this point. Ukraine is also taking a stance to pursue diplomatic negotiations with Russia, putting NATO membership on hold, and Russia is increasingly likely to engage in conditional negotiations with Ukraine to limit the prolonged impact of Western economic sanctions. This atmosphere is judged to have improved risk asset preference sentiment on the 9th.

Following the U.S. February Consumer Price Index (CPI) release scheduled for the 10th (local time) (expected 7.9% YoY, previous month 7.5%), inflation concerns may resurface. However, considering the possibility of stabilization in commodity prices including international oil prices (-12%, WTI) from the previous trading day, and the continued slowdown in China's February Producer Price Index (PPI) (8.8% YoY, previous month 9.1%), the outlook for inflation peaking in the first half of the year remains valid. In particular, attention should be paid to the fact that the probability of a U.S. recession calculated using the Fed's yield curve spread (12 months ahead) is only in the low 6% range. Concerns about a recession (stagflation) caused by the surge in commodity prices due to the Ukraine situation are considered excessive.

Today, the domestic stock market is expected to show strength, supported by the sharp drop in international oil prices due to expectations of easing in the Ukraine situation, and the surge in U.S. and European stock markets, despite caution over the U.S. February CPI and the simultaneous expiration of domestic futures and options. The won/dollar exchange rate, which had caused foreign selling along with geopolitical risks, is also currently falling sharply by more than 10 won offshore, which is expected to create a favorable stock market environment. However, with Yoon Seok-yeol confirmed as the winner of the 20th presidential election, attention should be paid to increased intraday price volatility of major candidates' policy beneficiaries and theme stocks.

Seo Sang-young, Mirae Asset Securities: "Rise in U.S. and European stock markets positive for Korean stocks... Commodity prices still a burden"

As expectations for the 4th round of Russia-Ukraine negotiations rise and the commodity futures market plunges, the rise in U.S. and European stock markets is expected to have a positive impact on the Korean stock market. Foreign demand is also positive. In the New York offshore non-deliverable forward (NDF) market, the dollar weakened, and the dollar/won exchange rate recorded 1,224 won, suggesting the exchange rate will start down by 14 won.

However, the cause of the sharp intraday drop in the Chinese stock market the previous day needs to be monitored. The U.S. Department of Commerce mentioned the possibility of a second round of sanctions on China related to Russia, highlighting the potential for renewed U.S.-China trade conflicts.

Commodity prices remain high, which is also a burden. This could lead to increased corporate costs and social unrest in the Middle East. Nickel prices surged from around $20,000 per ton to $100,000 due to the Ukraine situation and squeezes, prompting the London Metal Exchange (LME) to cancel and suspend trading, continuing volatility expansion.

Although international oil and grain prices have sharply dropped, they remain at high levels. Food prices are higher than during the 2011 'Arab Spring,' and Egypt's wheat stockpile is only sufficient for five months, leaving instability factors in North Africa and the Middle East unresolved. Therefore, volatility in commodity and grain prices is expected to continue for some time.

Considering this, the Korean stock market is expected to start with a rise of around 1.5%, then undergo a process of digesting sell-offs, while focusing on the 4th round of Russia-Ukraine negotiations scheduled in Turkey on the 10th (local time), and likely show a cautious stance.