[Good Morning Market] US Stock Market Decline and Worsening COVID-19 in China... Will Domestic Market Be Held Back?

[Asia Economy Reporter Ji Yeon-jin] On the 5th (local time), all three major U.S. indices closed lower. Hawkish remarks by Lael Brainard, Vice Chair of the Federal Reserve (Fed), who is classified as a 'dove,' pulled down the corporate values of U.S.-listed companies. The possibility of additional sanctions against Russia also had an impact, with the stock prices of big tech companies, which had shown strong gains the previous day, falling sharply in just one day and leading the decline. The domestic stock market is also expected to see heightened caution ahead of the release of the U.S. Federal Open Market Committee (FOMC) minutes in the early hours of the 7th. However, since the domestic stock market has recently shown a decoupling phenomenon from the U.S., the downward pressure is not expected to be significant, but a differentiated stock market is likely to continue depending on inflation, interest rates, and China-related issues.

◆ Park Seok-hwan, Researcher at Mirae Asset Securities = Many investors refer to the rally that has continued since mid-March as a 'bear market rally' or 'dead cat bounce.' This is because there are no positive issues to overcome the sluggish situation amid unstable external conditions and a lack of momentum. Ultimately, investors need a selective investment strategy. Since this year's stock market will inevitably be exposed to continuous volatility, attention should be paid to 'superior blue-chip stocks resilient in crises' and companies that constantly innovate and grow based on 'high productivity, strong cash generation, and high pricing power.'

The MSCI Korea Index ETF fell 1.62%, and the MSCI Emerging Markets Index ETF dropped 1.84%. The 1-month NDF USD/KRW exchange rate was 1,218.90 won, reflecting a projected 4 won rise at the opening. The KOSPI is expected to start down about 1%.

◆ Han Ji-young, Researcher at Kiwoom Securities = Fed Vice Chair nominee Brainard mentioned that balance sheet reduction would begin as early as May and proceed at a rapid pace compared to the past, reigniting concerns about the Fed's accelerated tightening policy in the stock market. Regarding additional sanctions related to Western countries' suspicions of Russian war crimes, the Wall Street Journal reported that the U.S. would announce sanctions freezing overseas assets of some large Russian banks such as VTB. The EU announced plans to propose to the parliament a ban on imports of Russian coal.

On the 6th (early morning of the 7th Korean time), the minutes of the March FOMC meeting are scheduled to be released, which will reveal the extent of quantitative tightening discussions within the Fed. If the minutes mention hawkish discussions such as a significant increase in the scale of bonds not reinvested upon maturity or the sale of held bonds like 10-year notes regardless of maturity, short-term financial market volatility, especially in the bond market, is expected to increase.

Today, the domestic stock market is expected to show stagnant price movements due to the sharp drop in the U.S. Nasdaq and caution ahead of the March FOMC minutes. However, since the domestic stock market has shown less price resilience compared to the U.S. market since mid-March, overall downward pressure on the index is expected to be limited, with differentiated market trends based on individual issues such as inflation, interest rates, and China.

◆ Park Sang-hyun, Researcher at Hi Investment & Securities = The spread of COVID-19 is burdening the Chinese economy not only through domestic demand but also logistics disruptions, while the Chinese government's stimulus policies are delayed or their effects may be diminished, amplifying concerns about China's economic slowdown. Above all, amid ongoing global supply chain disruptions caused by the Ukraine crisis, if China also negatively impacts the global supply chain, it would pose a significant burden by increasing inflationary pressures as well as affecting the global economy.

While the U.S. stock market has shown a favorable trend centered on growth stock rebounds after the Ukraine war, the domestic stock market has failed to break out of a sideways trend, partly due to ongoing China risks. In particular, in addition to existing negative factors related to China, even if domestic demand in China is excluded, if manufacturing and logistics disruptions worsen due to the spread of COVID-19, i.e., global supply chain disruptions, it will pose a significant burden on domestic exports and manufacturing conditions in the second quarter. Among the multiple crises (Polycrisis) faced domestically, China risk is a key issue in alleviating the differentiation phenomenon between the domestic economy and the U.S. stock market.