[Weekly Market Outlook] Market Holds Breath Ahead of February FOMC Results

Foreigners Net Buyers Every Day Except One in January
Market Focuses on Fed's Mid-Term Interest Rate Direction

[Asia Economy Reporter Minji Lee] The domestic stock market, which was closed for two days due to the Lunar New Year holiday, rose to just below the 2500 mark, powered by a storm of buying from foreign investors. This week (January 30?February 3), the KOSPI is expected to show sensitive movements based on the medium-term interest rate direction of Federal Reserve (Fed) officials following the announcement of the Federal Open Market Committee (FOMC) meeting results.

Jerome Powell, Chairman of the U.S. Federal Reserve (Fed). Photo by Yonhap News Agency

According to the Korea Exchange, last week the KOSPI rose more than 3%, from 2395.26 to 2484.02. It showed an upward trend for three consecutive trading days, with gains exceeding 1% on both the 25th and 26th, after the Lunar New Year holiday ended.

The rise in the index was led by foreign investors. Foreigners recorded net buying for three consecutive trading days, with net purchases totaling 2.5463 trillion KRW during this period. Institutions bought stocks worth 498.3 billion KRW, while individuals sold stocks worth 3 trillion KRW net. Foreign investors have shown record-breaking buying momentum this month, purchasing over 6 trillion KRW worth of domestic stocks. Except for January 10, they recorded net buying every day this month.

The increase in foreign buying was due to the growing possibility of easing monetary tightening at the FOMC meeting on February 1. This was supported by the US 2-year Treasury yield falling to the low 4% range and rising concerns about job insecurity in big tech companies. Expectations for an improvement in the semiconductor industry outlook were also positive.

The KOSPI is expected to seek direction while focusing on the FOMC results. The US interest rate hike is expected to be 25 basis points (1bp = 0.01 percentage points), bringing the rate to 4.75%. While there is no disagreement on the hike size, there are significant differences in views regarding the final interest rate level and the timing of rate cuts. According to the CME FedWatch, the probability that the upper bound of this year’s benchmark interest rate will be 4.5% is 31.6%, and the probability of 4.75% is 31.4%. Younghwan Kim, a researcher at NH Investment & Securities, noted, “This FOMC will be an event confirming that while financial market participants and Fed officials share the same perception regarding short-term interest rate direction, there are differences in views on the medium-term interest rate direction.” NH Investment & Securities expects the KOSPI band to be between 2400 and 2530.

Key weekly events to watch include South Korea’s December Industrial Activity Trends released on the 31st, South Korea’s January export-import trends on February 1, China’s January Caixin Manufacturing PMI, Eurozone January Manufacturing PMI, the January ISM Manufacturing Index announced on February 2, and the Eurozone ECB monetary policy meeting. The US January employment report, released on the evening of February 3, also deserves attention. If employment data come out strong, it could trigger the Fed’s tightening monetary policy.

Experts advise caution regarding profit-taking since a large amount of money flowed into risky assets throughout January. Although the stock market attracted significant interest supported by a weak dollar, a retracement could occur considering still-high absolute inflation and recession concerns. The recovery in demand related to China’s reopening may also be slow. Kwangnam Park, a researcher at Mirae Asset Securities, explained, “Demand reduction due to interest rate hikes is becoming more pronounced in countries other than China, which could offset the effects of China’s reopening,” adding, “It is also important to remember that the likelihood of a dramatic change in major central banks’ monetary policies is low.”

Some analysts also predict that foreign investors’ buying momentum will continue. Junho Byun, a researcher at IBK Investment & Securities, said, “Considering the significant net selling by foreigners during the COVID-19 phase and the greatly reduced foreign ownership ratio in domestic stocks, the buying trend is unlikely to end in the short term,” and added, “Even if the KOSPI undergoes a correction in February, the risk of a market downturn will not increase significantly because the end of US tightening and the bottoming out of South Korea’s exports are expected to materialize in March and April.”