[Good Morning Market] "Financial Risks Burden Domestic Stock Market... Expecting a Downward Start"

Concerns Spread in Banking Sector Ahead of FOMC
Worries Over Foreign Investor Demand Amid Won Weakness

On the 17th (local time), the U.S. stock market closed lower amid continued concerns over the banking sector. The Dow Jones Industrial Average fell 384.57 points (1.19%) to close at 31,861.98, while the large-cap S&P 500 index dropped 43.64 points (1.10%) to finish at 3,916.64. The tech-heavy Nasdaq index ended the day down 86.76 points (0.74%) at 11,630.51.

Image source=Reuters·Yonhap News

Ahead of the Federal Open Market Committee (FOMC) regular meeting scheduled for the 21st-22nd, the U.S. stock market responded cautiously to ongoing banking sector instability. First Republic, which received $30 billion in support from 11 major U.S. banks, fell about 32%. The stock declined further after the company announced it would suspend dividends after the market closed, heightening concerns. Shares of Bank of America, Wells Fargo, and JPMorgan also dropped more than 3%.

This intensified investors' risk aversion. Although the Federal Reserve (Fed) is expected to raise the benchmark interest rate by 0.25 percentage points at this FOMC meeting, worries that negative developments could spread throughout the financial sector have reduced the likelihood of a rate hike.

The domestic stock market is expected to open lower on the 20th. Sangyoung Seo, Head of Media Content at Mirae Asset Securities, explained, "With economic indicators contracting compared to the previous month and financial sector issues expected to be reflected going forward, the possibility of economic slowdown has increased, raising concerns about a U.S.-originated recession. Inflation is showing signs of downward stabilization, leading to a sharp drop in government bond yields, a strengthening of the yen against the dollar, and a surge in gold prices, all indicating increased preference for safe-haven assets."

He added, "The expansion of risks in the financial sector could ultimately lead to reduced corporate lending, highlighting the possibility of a recession, which poses a burden on the domestic stock market that is highly dependent on exports. The likelihood of won depreciation has increased, which could act as a burden on foreign investor demand and thus negatively impact domestic market sentiment."

However, Seo viewed the strong performance of AI-related companies and the limited 0.47% decline in the Philadelphia Semiconductor Index, which supported tech stocks, as positive signs. He said, "The domestic stock market is expected to start with a decline of around 0.5%, followed by weakness due to foreign investor demand concerns amid recession issues. With high levels of caution ahead of the FOMC, sector differentiation is expected to progress."

Ji-young Han, a researcher at Kiwoom Securities, predicted that the domestic stock market would continue to experience volatility amid lingering effects of the banking sector crisis and major domestic and international events such as the FOMC meeting. Han stated, "Historically, concerns that banking crises are difficult to resolve quickly persist, and some market participants’ negative feedback appears to be psychologically reinforcing the severity of the situation. However, since this event falls within the expected range of adverse developments and the government and financial authorities are expected to take additional measures to manage the situation, the view that the market is unlikely to experience further sharp declines or re-enter a bear market remains valid."

She added, "The upcoming Fed March FOMC meeting, which triggered the current crisis, will be a variable that could frequently stimulate volatility this week. So far, the Fed has focused on price stability, but depending on how much financial stability is considered in light of this crisis, market expectations regarding the future tightening path could be revised. Therefore, it is important to pay attention to related remarks from Fed Chair Jerome Powell."