[Good Morning Stock Market] Limited Impact of SVB Incident but Volatile Market... Increasing Cautious Sentiment

[Image source=Yonhap News]

[Asia Economy Reporter Kwon Jae-hee] Last Friday, the U.S. stock market showed a sluggish start despite positive announcements such as a slowdown in hourly wages in the employment report, as concerns about regional banks surfaced. Later, the market turned upward on expectations that the related issues would not spread. Additionally, U.S. President Joe Biden's statement expressing 'confidence' that next week's Consumer Price Index (CPI) would show favorable results also had a positive effect. However, after U.S. regulators announced the initiation of bankruptcy proceedings for Silicon Valley Bank (SVB) Financial, the market turned downward and the decline accelerated. Particularly, the impact of high interest rates led to sell-offs mainly in small and mid-cap stocks, causing all three major New York indices to close lower. The Dow Jones 30 Index fell by 1.07%, the Nasdaq by 1.76%, and the Standard & Poor's (S&P) 500 Index by 1.45%.

Among individual stocks, Roku (-0.88%) experienced a significant drop in after-hours trading after it was reported that 26% of its assets, including cash, were deposited at SVB. Roblox (0.28%) also fell over 1% following news that 5% of its assets were deposited there. While regional banks showed weakness due to the SVB incident, major banks such as Wells Fargo and JP Morgan remained solid.

The U.S. regulators' closure of SVB Financial and initiation of bankruptcy proceedings are expected to weigh on our stock market. However, since this is an issue limited to an individual company with little likelihood of spreading, the impact is expected to be limited. President Biden's announcement that inflation will show favorable signs is positive, but the Biden administration's news of strengthening export restrictions on semiconductor manufacturing equipment is a burden. Therefore, our stock market is expected to start flat and then remain cautious.

Seo Sang-young, Head of Media Content Division at Mirae Asset Securities: "Limited Impact of SVB Incident... Cautious Ahead of U.S. CPI Release"

[Image source=Yonhap News]

Today, the KOSPI is expected to start slightly lower. Our stock market is anticipated to remain cautious amid developments in the Silicon Valley Bank (SVB) incident and the upcoming Consumer Price Index (CPI) release.

Last Friday, our stock market opened lower influenced by the U.S. market's sluggish performance due to political instability and financial system concerns. Particularly, the overall weakness across Asian markets dampened investor sentiment, adding to the burden. Additionally, the Chinese stock market declined amid heightened U.S.-China tensions, as Biden's budget includes funding related to controlling U.S. capital investment in Chinese companies, which also weighed on our market. As a result, the KOSPI fell by 1.01%, and the KOSDAQ closed down 2.55%, with a clear weakness in stocks that had recently driven gains.

Meanwhile, although the U.S. market initially rose, the U.S. regulators' closure of Silicon Valley Bank (SVB) Financial and the start of bankruptcy proceedings led to a sharp decline, which is a burden on our market. However, considering that this is an isolated corporate issue with low likelihood of spreading, the impact is judged to be limited. Of course, concerns cannot be entirely dismissed as some tech stocks like Roku have deposits frozen, but major banks are showing solid performance.

The news that the Biden administration will further tighten restrictions on semiconductor manufacturing equipment exports to China is a burden. This, along with regulatory budget items related to U.S. capital investment in Chinese companies included in the Biden administration's budget, indicates that U.S.-China tensions may escalate further. Ultimately, the increased volatility in tech stocks due to SVB Financial's bankruptcy and the inflow of U.S.-China conflict issues are additional burdens.

However, the slowdown in hourly wages in the U.S. employment report and the temporary increase in nonfarm payrolls due to mild weather boosting outdoor activities suggest a high probability of a 25 basis points (0.25%) rate hike by the Fed in March, which is favorable. Furthermore, President Biden's early assertion of 'confidence' that the Consumer Price Index (CPI) to be released on the 14th will show favorable results is also positive.

Han Ji-young, Researcher at Kiwoom Securities: "SVB Incident, U.S. CPI, Chinese Real Economy Indicators... 'Cautious' Position Valid Amid Volatile Market"

Our stock market is expected to show volatility due to factors such as the U.S. February employment data, February CPI, potential changes in the Fed's tightening path, the aftermath of the SVB incident, and Chinese real economy indicators.

Last Friday (the 10th), with all three major New York indices closing sharply lower due to the SVB bankruptcy, investors are focused on whether the SVB incident will spread as a systemic risk as in the past.

Based on statements from key policymakers such as Treasury Secretary Janet Yellen, the likelihood of systemic risk appears low. For systemic risk to occur, liquidity crises must spread to major commercial banks, but since 2008, the financial soundness of major banks has strengthened. It is also important to note that the bonds SVB invested in and suffered losses on were long-term government bonds (accounting for 50% of total assets as of the end of December 2022) with a high proportion of unrealized losses.

Also, since SVB's main clientele consists of bio-venture and tech-related startups, investment sentiment in these sectors is expected to be unstable in the short term. However, the possibility of this becoming a major negative factor across the entire stock market is limited.

Alongside the SVB incident, the U.S. February CPI results are expected to be a significant event. The current consensus predominantly forecasts a decline compared to the previous month. Whether this CPI result will lead the market to significantly revise its expectations for the March FOMC rate hike will likely determine the market direction during the week.

In addition to this, other macro events such as Chinese real economy indicators and the ECB meeting, as well as domestic factors like potential further volatility in leading sectors such as secondary batteries and entertainment stocks, remain as materials to be digested during the week. Since price fluctuations within the index's trading range may increase, responding with a 'cautious' stance seems appropriate.