[MarketING] Investor Sentiment Shaken Amid SVB Aftershocks and Inflation Concerns

KOSPI Falls Below 2400 and KOSDAQ Below 770
Investment Sentiment Shrinks Amid SVB Crisis Aftershocks
Caution Ahead of US Inflation Data Release

On the 14th, the KOSPI index opened at 2389.74, down 0.86 percentage points from the previous day, as dealers were busy moving in the Hana Bank dealing room in Jung-gu, Seoul. Photo by Dongju Yoon doso7@

The KOSPI fell below the 2400 mark after just one day. This is interpreted as the lingering anxiety expanded by the bankruptcy of the U.S. Silicon Valley Bank (SVB) not dissipating easily. It also seems that caution has increased ahead of the U.S. February Consumer Price Index (CPI) announcement. Given the short-term uncertainty, it is advised to respond with a wait-and-see approach, and focusing on large-cap stocks with high market capitalization is considered effective.

KOSPI Falls Below 2400 After One Day

As of 10:25 a.m. on the 14th, the KOSPI was at 2,365.57, down 45.03 points (1.87%) from the previous day. The KOSDAQ fell 19.41 points (2.46%) to 769.48.

Investor sentiment, weakened by the aftershocks of the SVB bankruptcy, does not seem to recover easily. Sangyoung Seo, a researcher at Mirae Asset Securities, explained, "The U.S. stock market still shows increased volatility despite the government authorities' solutions to the SVB incident, which burdens the Korean stock market. Especially, the panic buying in the bond market and the increased volatility in interest rates are sources of concern." He added, "Despite the U.S. government authorities' solutions to the SVB incident, psychological stability must accompany the resolution of the situation."

The U.S. stock market closed mixed the previous day. On the 13th (local time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average fell 0.28%, the S&P 500 dropped 0.15%, while the Nasdaq rose 0.45% compared to the previous session.

There are forecasts that the stock market will not enter a bear market again due to this incident. Jiyoung Han, a researcher at Kiwoom Securities, said, "It is true that the SVB incident caused volatility in the stock market by modifying the existing Federal Reserve (Fed) monetary policy path. However, for the stock market to enter a bear market again and fall below the yearly low, an unexpected new negative factor must appear. Since this incident is largely within the category of negative effects caused by accumulated tightening, the probability of entering a bear market and falling below the yearly low is low."

However, as downward pressure increases, the possibility of switching to a bearish phase cannot be ruled out. Kyungmin Lee, a researcher at Daishin Securities, said, "Recently, beyond high-intensity tightening, economic uncertainty and financial system instability are increasing, and despite fluctuations in the U.S. dollar, the won continues to face depreciation pressure. Therefore, the possibility of increased downward pressure on the KOSPI, which had shown relatively steady performance, is high." He added, "We should be cautious about the increased volatility and possible shift to a relatively weak phase of the KOSPI, which has held up well so far." He further noted, "While a strategy to increase weighting during corrections is valid, it is not yet the right time, and risk management is necessary."

Sanghyun Park, a researcher at Hi Investment & Securities, said, "It is necessary to observe further whether the credit crisis triggered by the SVB incident will spread or subside. Fortunately, the U.S. government and the Fed are preventing the spread of the credit crisis through proactive emergency measures, but it will inevitably take more time until the bank run phenomenon calms down." He added, "The financial market wants confirmation of a policy shift from the Fed and other major global countries to end the tightening stance, such as stopping interest rate hikes or lowering rates, for the SVB incident to subside."

Can Inflation Indicators Stabilize Investor Sentiment?

As the aftershocks of the SVB incident continue, the market is closely watching the U.S. February CPI announcement scheduled for that day.

Due to the SVB bankruptcy aftermath, the likelihood of a big step (0.5 percentage point rate hike) at the March Federal Open Market Committee (FOMC) meeting on the 22nd has diminished, with more weight given to a baby step (0.25 percentage point rate hike). Depending on the February CPI results, it will be possible to gauge whether this outlook gains more support. According to the Chicago Mercantile Exchange (CME) FedWatch, the probability of a 25 basis point (1bp=0.01 percentage point) rate hike at the March FOMC is 62%, a significant change from last week when a 50bp hike was the consensus. The probability of a rate freeze also increased from 0% before the SVB incident to 38%.

The market forecast for the U.S. February CPI, to be announced that night, is 6.0%, and the core CPI is 5.4%. These are lower than the previous month’s 6.4% and 5.6%, respectively. Researcher Jiyoung Han said, "If the figures come in lower than expected, the short-term outlook for a rate freeze in March will gain strength. However, until the March FOMC, the consensus on the rate hike intensity will fluctuate frequently due to news flow related to the SVB incident. The February CPI is market-neutral, and it is appropriate to assume a 25bp hike as the base scenario for the March FOMC when responding to the stock market."

There is also a forecast that the market will stabilize if the CPI meets expectations. Ilhyuk Kim, a researcher at KB Securities, said, "What is worrisome now is a scenario where inflation rises to a level that prevents easing monetary tightening. If the February CPI released tonight significantly exceeds expectations, concerns may grow that the Fed will prioritize price stability over financial stability. However, if the CPI comes out as expected, the market will begin to stabilize."