[MarketING] Financial Anxiety and the FOMC... Heightened Vigilance

KOSPI Moves Sideways
KOSDAQ Recovers Above 800 After Turning Up
Market Likely to Remain Cautious Ahead of FOMC

[Image source=Yonhap News]

The KOSPI is fluctuating around the flat line in the early trading session. The market appears unable to find direction as expectations for eased financial instability following Switzerland's largest bank UBS's acquisition of Credit Suisse (CS), the lingering effects of the U.S. Silicon Valley Bank (SVB) crisis, and the upcoming U.S. Federal Open Market Committee (FOMC) meeting in March all simultaneously influence investor sentiment.

KOSPI Fluctuates Around Flat Line

As of 10:30 a.m. on the 20th, the KOSPI was at 2,392.47, down 3.22 points (0.13%) from the previous session. The KOSDAQ rose 3.74 points (0.47%) to 801.13. The KOSPI initially opened lower but then turned upward to reclaim the 2,400 level before falling back again. The KOSDAQ also started lower but recovered above the 800 mark and maintained its upward momentum.

The market seems somewhat stabilized following the news that UBS will acquire CS. On the 19th (local time), UBS and CS announced they had signed a merger agreement with UBS as the surviving entity. UBS's acquisition price for CS is 0.75 Swiss francs per share, totaling 3 billion Swiss francs (approximately 4.24 trillion KRW). All CS shareholders will receive 1 UBS share for every 22.48 CS shares they hold. This valuation is significantly below CS's market value based on the closing price on the 17th (1.86 Swiss francs per share).

Moon Nam-jung, a researcher at Daishin Securities, said, "With UBS's acquisition of CS, the possibility of crisis contagion spreading across European banks and the entire financial industry is temporarily resolved, which could calm financial market instability. The stock market is expected to rebound on relief, leading to a risk-on preference for risky assets."

Although the market is relieved by UBS's acquisition of CS, the aftereffects of the U.S. SVB crisis still require close observation. On the 17th (local time), the U.S. stock market closed lower as financial stocks weakened. The Dow Jones Industrial Average fell 1.19%, the S&P 500 dropped 1.10%, and the Nasdaq declined 0.74%. Financial stocks showed weakness as First Republic Bank's shares, which had rebounded the previous day on support news from major banks, plunged more than 30%. Additionally, SVB Financial, the parent company of SVB, filed for bankruptcy protection in a New York court that day.

Seo Sang-young, a researcher at Mirae Asset Securities, analyzed, "The U.S. stock market's weakness due to the sharp decline in financial stocks is a burden for the Korean stock market. Especially, the increased risk in the financial sector could lead to reduced corporate lending, highlighting the possibility of an economic recession, which could be a burden for the export-dependent Korean stock market."

While it seems unlikely that this crisis will be resolved quickly, it is also analyzed that the stock market will not re-enter a bear market due to this. Han Ji-young, a researcher at Kiwoom Securities, said, "Historically, concerns that banking crises do not subside quickly remain, and some market participants seem to be psychologically reinforcing the severity of the situation through negative feedback. However, since this event falls within the expected range of adverse events and the government and financial authorities are expected to take additional measures to resolve the situation, the SVB-related crisis is unlikely to cause further sharp declines or a re-entry into a bear market."

FOMC Becomes Even More Important

With financial instability unresolved, market caution is expected to intensify ahead of the March FOMC. Attention will inevitably focus not only on interest rate hikes but also on the Fed's views and responses to the recently surfaced financial instability issues.

One researcher said, "The scheduled interest rate decision by the U.S. Federal Reserve (Fed), which triggered the current crisis, later this week will be a variable that frequently stimulates volatility during the week. Besides the rate decision, the Fed's perspective on the SVB-related banking crisis will be another key point to watch at this FOMC. So far, the Fed has focused on price stability, but depending on how much financial stability is taken into account due to this crisis, market forecasts regarding the future tightening path could be revised. Therefore, it is important to pay attention to related remarks by Fed Chair Jerome Powell."

Market movements are expected to be limited due to cautious sentiment. Choi Yoo-jun, a researcher at Shinhan Investment Corp., predicted, "With a high possibility of a 25 basis points (1bp = 0.01 percentage point) rate hike at the March FOMC, the Fed's perception of the final rate level and the series of banking liquidity noise will be important. Due to event wait-and-see sentiment, KOSPI movements are likely to slow, and the market will continue to focus on themes centered on growth potential and policy-supported businesses."