[MarketING] Limited Uptrend Amid FOMC Watchfulness

KOSPI and KOSDAQ Close Slightly Higher
Sideways Trend Expected Until FOMC Ends

[Image source=Yonhap News]

The KOSPI closed with a slight gain. As cautious sentiment deepened ahead of the U.S. Federal Open Market Committee (FOMC) meeting in March, the extent of the rise was limited. It is expected that a limited movement amid cautious sentiment will continue until the FOMC results are confirmed.

KOSPI Slightly Up... Gains Limited by Cautious Sentiment

On the 21st, the KOSPI closed at 2,388.35, up 9.15 points (0.38%) from the previous day. The KOSDAQ ended the session at 802.53, up 0.33 points (0.04%).

On this day, the stock market showed limited gains due to heightened cautious sentiment ahead of the FOMC. Kim Seok-hwan, a researcher at Mirae Asset Securities, explained, "As the U.S. stock market rose, recovering risk asset preference sentiment due to easing financial risks from Credit Suisse (CS), a weaker dollar, and rising Treasury yields, the domestic market also showed a synchronized movement. However, the intraday narrowing of the won's appreciation led the index to partially give up gains, and cautious sentiment toward the FOMC persisted, limiting the index's rise."

The FOMC is scheduled to take place on March 21-22 (local time), with the interest rate decision to be announced in the early hours of March 23 Korean time. Until the interest rate results are released, this limited market movement is expected to continue.

Currently, the market is leaning toward a 25 basis points (1bp = 0.01 percentage point) rate hike at this FOMC. Lee Kyung-min, a researcher at Daishin Securities, said, "The key points of this FOMC are the March base rate decision, changes in the dot plot for this year, and the scale of rate cuts in 2024-2025. Although the rate hike trend is expected to continue this time, signs of market fractures due to monetary tightening have become visible, so the possibility of a 25bp hike is high." In this case, the shock to the market is expected to be limited.

Labor Gil, a researcher at Shinhan Investment Corp., said, "Financial market caution is higher than ever ahead of the FOMC. Investors had left open the possibility of a 50bp hike after confirming stronger-than-expected inflation data, but after experiencing the banking crisis, investors have lowered their expectations for the March rate hike to 25bp."

The probability of a 25bp rate hike implied by federal funds futures is 64.2%, while the possibility of a 50bp hike has disappeared.

Baby Step Rather Than Freeze... Expectations for Rate Cuts in the Second Half

Recently, amid banking risks, the possibility of a rate freeze at this FOMC has also been raised. According to the Chicago Mercantile Exchange (CME) FedWatch, the probability of a rate freeze is 24%, whereas a month ago, the rate freeze outlook was 0%.

There are opinions that a rate freeze would not be positive for the market. Researcher Lee said, "Although the probability is low, if the Federal Reserve officially signals a shift in monetary policy after a rate freeze, there could be short-term relief sentiment, but it would also trigger greater risks surfacing." He added, "This means abandoning the central bank's goal and duty of price stability and acknowledging that the SVB incident is more serious and could spread more than expected."

Another researcher said, "If the Fed actually freezes rates, it could send a signal to the market that the current crisis is not properly controlled or undermine confidence in their tightening policy. Until the announcement, volatility in stock prices and interest rates may increase due to debates over a rate freeze versus a 25bp hike, but it is reasonable to assume and respond based on a base scenario of a 25bp hike and a less hawkish future tightening path through revisions to the dot plot or economic outlook."

Expectations for rate cuts in the second half of the year are also likely to be highlighted again. Byun Jun-ho, a researcher at IBK Investment & Securities, said, "As concerns over the bankruptcy of the U.S. Silicon Valley Bank (SVB) spread to U.S. small and medium-sized banks and European banks, the CME FedWatch has begun to reflect the possibility that this March FOMC will be the last rate hike." He added, "While it may be somewhat early to expect rate cuts starting in the summer, the likelihood of renewed expectations for rate cuts in the second half has increased."