[Good Morning Stock Market] March FOMC Brings Market Relief... Caution Advised on Increased Volatility

The New York stock market fluctuated once again following remarks by Jerome Powell, Chairman of the U.S. Federal Reserve (Fed). The market started lower amid concerns over regional banks due to the fallout from PacWest, but stabilized after the March Federal Open Market Committee (FOMC) announced a 0.25 percentage point rate hike as expected. However, Powell’s repeated statements that there would be no rate cuts led to an expanded decline, especially in financial stocks. The Dow Jones Industrial Average closed down 1.63%, the Nasdaq fell 1.60%, and the Standard & Poor’s (S&P) 500 index dropped 1.65%.

The U.S. stock market’s weakness, driven by recession fears following Powell’s remarks, is expected to weigh on the Korean stock market. Additionally, the Fed’s indication that it will maintain high interest rates after the hike has highlighted banking risks, which have recently been a burden on the market, further pressuring the Korean market. Nonetheless, the fact that the Fed is approaching the end of its rate hike cycle is expected to have a positive impact. Accordingly, the Korean stock market is expected to start down about 0.5% but narrow losses supported by won strength.

[Image source=Reuters Yonhap News]

Seosangyoung, Head of Division: “KOSPI to start down about 0.5% then narrow losses”

The U.S. stock market’s weakness due to Powell’s statements that there will be no rate cuts, which raised recession concerns, is a burden for the Korean stock market. Although the banking system was claimed to remain robust, the current situation has worsened credit conditions, and the uncertainty about a soft landing for the economy is also a burden. The Fed’s policy to maintain high interest rates and the increased banking risks are expected to weigh on the Korean market.

Nonetheless, the fact that the Fed’s rate hike cycle is nearing its end is expected to have a positive effect on the Korean stock market. In particular, this stance is likely to eventually highlight a weaker U.S. dollar and a stronger won, which is favorable.

[Image source=Reuters Yonhap News]

Han Jiyoung, Researcher: “Market floor solid at 2300 but volatile trading expected”

The March FOMC, which was the market’s top concern, can be considered less hawkish. Powell’s remarks suggest that the Silicon Valley Bank (SVB) crisis gave him justification to adopt a less hawkish stance. However, while the FOMC results alone might have created a market-friendly environment, Treasury Secretary Yellen’s shift in stance?saying “full deposit guarantees are not being considered”?appears to have triggered a sharp decline in the U.S. market late in the session.

Since systemic risk remains unlikely, the previous forecast that the Korean market’s floor will remain solid is still valid. However, while the index floor is unlikely to fall below 2300 easily, it should be noted that price volatility within the index range may increase. Uncertainties such as bank runs at U.S. small and mid-sized banks and political noise surrounding expanded deposit guarantees are expected to cause volatility. As cash becomes increasingly important, it is appropriate to establish market strategies focusing on companies with solid earnings outlooks and strong cash flows, such as big tech growth stocks.

Today, the Korean stock market is expected to show volatility due to uncertainties like bank runs at U.S. small and mid-sized banks following Treasury Secretary Yellen’s shift in stance, despite the neutral-to-positive March FOMC results. The market is likely to be influenced intraday by changes in futures markets related to U.S. small and mid-sized banks. Since volatility typically emerges as market participants adjust their stock and interest rate outlooks after the FOMC, it is advisable to take a cautious stance.