[Good Morning Stock Market] Market Fluctuates Amid 'Interest Rate' and 'Economic' Concerns

US Stock Market Rises Despite Employment Data Surprise
Foreign Profit-Taking Pressure Grows Amid Lack of Market Demand
"Semiconductors and Secondary Battery Leaders Absent, Difficult to Expect Sustained Uptrend"

[Image source=Yonhap News]

[Asia Economy Reporter Minji Lee] Last Friday, the U.S. stock market initially declined following the release of solid employment data. However, as analyses suggested that inflationary pressures had peaked, the market rebounded and ended the day mixed. The Dow Jones Industrial Average rose by 0.1%, the S&P 500 index fell by only 0.12%, and the Nasdaq index declined by 0.18%, leading to expectations that the KOSPI will also see a reversal of last Friday’s losses.

However, some experts advise a cautious approach to the market, considering that expectations for interest rate cuts have largely been priced in and that selling pressure from foreign investors realizing profits is increasing.

Sangyoung Seo, Researcher at Mirae Asset Securities: “KOSPI Expected to See Reversal of Last Friday’s Decline”

The Korean stock market fell last Friday due to large-scale futures selling by foreign investors. In particular, concerns over the semiconductor industry were highlighted following Micron’s decline, which led to heavy selling by foreign and institutional investors, especially targeting Korean semiconductor companies, further widening the index’s drop.

Amid this, the fact that the U.S. stock market rebounded after an early decline is positive for the domestic market. Despite the solid U.S. employment report, the weak details eased concerns about the Federal Reserve’s aggressive rate hike stance reemerging. The Philadelphia Semiconductor Index also fell nearly 3% but limited its loss to 1.19% after a late-session rebound buying.

Additionally, Chinese President Xi Jinping’s remarks that Omicron is less deadly and the growing expectations for easing China’s zero-COVID policy are favorable. This could boost expectations for Korean exports to China due to the positive impact on the Chinese economy. Considering this, the domestic market is likely to see a reversal of last Friday’s decline.

Kyoungmin Lee, Researcher at Daishin Securities: “A Market That Reacts Volatilely, Time to Be Wary of Profit-Taking Selling”

The global stock market is reacting sensitively to changes in consensus on monetary policy rate hikes. While Federal Reserve Chair Jerome Powell’s press conference had sparked hopes for a Santa rally, the market mostly recovered intraday losses after last week’s strong employment data was tempered by weak underlying details.

The immediate market plunge and dollar surge following the report were driven by stagnant unemployment rates, new jobs exceeding expectations, and a month-over-month rise in wage growth. However, as the improvement was interpreted to be limited to certain sectors and industries, investors maintained their expectations for rate cuts in 2023, expanding their sense of relief.

To summarize the market’s view: economic weakness is already priced in, and a 50 basis point rate cut in the second half of this year is possible. These two cannot coexist, but the market is choosing to see only what it wants. Currently, the market is pricing in a 50 basis point rate cut in the second half of 2023, but expectations for rate cuts are unlikely to strengthen further and are unlikely to serve as a driving force for a global financial market rally. It should not be overlooked that the dot plot presented at the September FOMC shows a 70 basis point gap between the 2023 and 2024 policy rates.

For the time being, it is necessary to be cautious about profit-taking selling. The recent decline in the KOSPI was driven by foreign investors switching to selling. The absence of major domestic buyers in the KOSPI’s supply-demand structure has increased the influence of foreign trading, where even small sell orders relative to buy volume are exerting downward pressure on the KOSPI. In fact, from September to mid-October, foreign net selling amounted to only 2.5 trillion KRW, yet the KOSPI plunged by 411 basis points. With existing leading stocks such as semiconductors and secondary batteries continuing to weaken, a trend reversal is difficult to expect. As short-term rotation continues and the KOSPI fluctuates within the 2400?2500 range, upward momentum is weakening. Rather than increasing expectations based on confirmation bias, it is time to face reality soberly.