[Good Morning Stock Market] Increased Volatility and Investor Sentiment Decline in US Markets... Pressure on Domestic Stock Market

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Lee Jung-yoon] On the 20th (local time), the U.S. stock market opened higher as risk asset preference increased due to China's economic stimulus measures. However, concerns about a recession arose following individual stock earnings reports, leading to a decline, but the market rose again just before the close, ending mixed. The Dow Jones Industrial Average closed at 31,261.90, up 8.77 points (0.03%) from the previous session. The S&P 500 index ended at 3,901.36, up 0.57 points (0.01%), while the tech-heavy Nasdaq index closed at 11,354.62, down 33.88 points (0.30%). The increased volatility and weakened investor sentiment in the U.S. market are expected to weigh on the domestic market on the 23rd.

◆ Sangyoung Seo, Researcher at Mirae Asset Securities = The U.S. stock market declined as the Federal Reserve's (Fed) obsession with raising the benchmark interest rate turned into fears of a recession. Notably, the S&P 500 index fell more than 20% from its previous high during the session, entering a bear market. The earnings reports from some retail companies reflected a 'recession' due to changes in consumer behavior, accelerating the stock price decline. Additionally, the interest rate hikes increased corporate financing costs, which is estimated to have contributed to a faster slowdown in earnings.

Nevertheless, rebound buying sentiment has also increased, resulting in heightened volatility. Buying during declines and selling during rises are clashing. The increased volatility and weakened investor sentiment in the U.S. market are expected to burden the domestic market. In particular, recession concerns highlighted by retail sector earnings and the strong U.S. dollar have raised safe-haven demand, likely causing some of the earlier gains to be given back.

However, China's proactive economic stimulus measures continue, which is positive for investment sentiment originating from China. Furthermore, the United Nations' (UN) attempt to mediate the trade of Russian grain has led to a downward trend in wheat prices, signaling a likely peak in inflation due to falling major commodity prices. The domestic market is expected to open down about 0.3%, but considering China's stimulus measures, individual stock movements are likely to dominate within a limited range of fluctuations.

◆ Jiyoung Han, Researcher at Kiwoom Securities = On the 20th, the U.S. stock market plunged more than 2% intraday due to a sell-off but narrowed losses as bargain hunters entered late in the session. However, market sentiment remains uneasy. As confirmed by last week's earnings shocks from major U.S. retailers such as Walmart and Target, concerns about stagflation?stemming from inflation intensification and reduced consumer spending?are being reflected in stock prices.

However, the current pessimism is judged to be excessive. From a price perspective, it is appropriate to maintain the view that major global markets have already priced in a significant portion of negative factors during their rapid entry into bear markets since the beginning of the year. Additionally, China, which had been a source of inflation and economic slowdown concerns, reaffirmed the effectiveness of its stimulus policy through a reserve requirement ratio cut. Moreover, the full resumption of business operations in the Shanghai area starting June 1 is expected to contribute to the recovery of investor sentiment in Asian markets.

Whether the U.S. dollar's strength will ease further is also expected to influence investor sentiment. Since key officials have confirmed the Fed's economic assessment and policy path, the impact is likely to be limited. Attention should also be paid to the ongoing discussions between the South Korean and U.S. governments on a treaty akin to a currency swap. Although currency swaps are typically within the central banks' domain rather than governments', this could help calm the recent overshooting surge in the won-dollar exchange rate. This factor is expected to support the downside of the domestic market amid macroeconomic uncertainties.