[Good Morning Stock Market] "KOSPI Expected to Start Lower... Foreign Investor Flows Are Key"

US Stock Market Plummets... Reemergence of Recession Concerns

[Image source=Yonhap News]

[Asia Economy Reporter Hwang Yoon-joo] On the 29th, the Korean stock market is expected to start lower. It is likely to be affected by the sharp decline in the U.S. stock market due to concerns about an economic recession. The U.S. stock market opened higher the previous day, supported by news of China's easing of COVID-19 restrictions and economic stimulus policies, but turned downward as selling pressure emerged due to a loss of confidence in the economy following a slowdown in the consumer confidence index and the Richmond Federal Reserve index.

On the 28th (local time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 30,946.99, down 491.27 points (1.56%) from the previous session. The S&P 500, centered on large-cap stocks, closed at 3,821.55, down 78.56 points (2.01%), and the tech-heavy Nasdaq closed at 11,181.54, down 343.01 points (2.98%).

Suh Sang-young, Head of Mirae Asset Securities: "KOSPI Expected to Start Down About 1%... Direction Determined by Foreign Investor Flows"

On the 17th, dealers are working in the dealing room of Hana Bank in Euljiro, Seoul, as the KOSPI index fell below the 2400 level early in the session due to the impact of a sharp decline in global stock markets. The intraday break below 2400 on the KOSPI is the first in about 1 year and 7 months since November 5, 2020 (2370.85). Photo by Moon Honam munonam@

Suh Sang-young, Head of Mirae Asset Securities, stated, "The Korean stock market is expected to start down about 1%, and the direction and extent will be determined by foreign investor flows amid renewed concerns about an economic recession."

He explained, "The U.S. stock market's decline due to the resurgence of the 'economic recession' issue caused by weak economic indicators is a burden on the Korean stock market. The won's weakness due to the strong dollar and the resulting negative foreign investor flows are also factors behind the underperformance of large-cap stocks."

Head Suh analyzed, "In particular, the renewed recession concerns due to the contraction of the U.S. consumer confidence index and the Richmond Federal Reserve index weaken one of the recent factors driving the Korean stock market's rise, which may increase profit-taking desires."

The U.S. Conference Board's consumer confidence index for June fell 4.5 points from 103.2 in May to 98.7 (1985=100), marking the lowest level since February 2021 (95.2). Notably, the present situation index slightly decreased from 147.7 to 147.1, but the expectations index dropped significantly from 73.7 to 66.4, the lowest since March 2013 (63.7). This is interpreted as having stimulated economic concerns.

The Richmond Fed manufacturing index also recorded -19, significantly below last month's announcement (-9) and expectations (+2). Head Suh pointed out, "The Richmond Fed covers the U.S. mid-Atlantic region, which has a higher income level due to many professionals such as lawyers and accountants compared to other regions. Therefore, the slowdown in the Richmond Fed manufacturing index generally triggers concerns about an economic recession."

He added, "The MSCI Korea Index ETF fell 0.74%, the MSCI Emerging Markets Index ETF dropped 0.61%, and the offshore non-deliverable forward (NDF) USD/KRW 1-month rate was 1,290.79 won, reflecting an expected 6 won rise in the exchange rate at the start. Eurex KOSPI200 futures fell 1.16%, and the KOSPI is expected to decline by about 1%."

Han Ji-young, Kiwoom Securities Researcher: "Domestic Market Faces Downward Pressure... Energy and Travel Sectors Expected to Remain Resilient"

Han Ji-young, a researcher at Kiwoom Securities, stated, "The U.S. stock market's sharp decline due to weak U.S. consumer sentiment indicators and profit-taking following three consecutive days of gains is expected to exert downward pressure."

Han analyzed, "However, considering that Chinese authorities recently announced easing of COVID-19 restrictions, additional infrastructure, and consumption promotion investments, benefits such as increased oil consumption and travel are expected. Domestic energy, materials, and travel-related sectors are likely to show relatively resilient trends."

Meanwhile, Han noted that the June consumer confidence index included employment conditions in its survey items, unlike the University of Michigan consumer sentiment index, which mainly focuses on consumption. This means the index quantifies economic conditions.

Han said, "The fact that the future expectations index (May 73.7 → June 66.4), a detailed item within the index, hit its lowest level since March 2013 suggests that the sustainability of the employment boom, which the Fed had trusted, may not last as long as initially expected. Nevertheless, due to the nature of surveys, respondents' answers about future conditions tend to fluctuate frequently depending on their current environment."

Han pointed out, "As the New York Fed President emphasized on the 28th (local time) that despite tightening measures, the economy will not fall into a recession, while recession concerns are high, it is premature to reflect a full-blown recession in stock prices."

He added, "Rather than assuming a recession now, it is appropriate to respond by monitoring key real economy indicators scheduled for release in July, such as the ISM manufacturing index, employment data, and consumer prices."