[MarketING] Relief as Bank Risk Concerns Ease

KOSPI Rises After 3 Days
Box Range Market Expected to Continue

[Image source=Yonhap News]

The KOSPI is on the rise for the first time in three days. This is interpreted as a strong performance driven by relief over easing bank risk concerns. Although the index's downside remains solid, considering the stock market movements during past periods of increased volatility, it is expected that it will not be easy to break out of the current trading range for the time being.

KOSPI Rises for the First Time in Three Days on Eased Bank Risk

As of 10:15 a.m. on the 28th, the KOSPI stood at 2,424.46, up 15.24 points (0.63%) from the previous day. The KOSDAQ rose 1.16 points (0.14%) to 828.85.

The KOSPI, which had recently been weak due to concerns over the 'Bankdemic' (bank + pandemic), appears to have rebounded as worries about bank risks eased following news of the sale of Silicon Valley Bank (SVB) in the U.S. and a decline in Deutsche Bank's credit default swap (CDS) premium.

On the previous day, the U.S. Federal Deposit Insurance Corporation (FDIC) issued a statement announcing that First Citizens, based in North Carolina, had signed a contract to acquire all deposits and loans of SVB. First Citizens is reported to have acquired SVB's assets worth $72 billion (approximately 93.6 trillion KRW) for about $16.5 billion. Among the assets seized by the FDIC from SVB, some assets including stocks worth $90 billion (approximately 117 trillion KRW) will remain under receivership for FDIC disposal and will not be transferred to First Citizens. Additionally, the FDIC will receive stock valuation rights for First Citizens worth about $500 million.

The decline in Deutsche Bank's CDS premium, which had raised concerns, also contributed to easing bank risk. Deutsche Bank's CDS premium, which surged to 2.3 percentage points on the 24th, fell to 2.0 percentage points.

Sangyoung Seo, a researcher at Mirae Asset Securities, explained, "Concerns about U.S. regional banks eased as news spread that SVB was acquired by First Citizens and the possibility of additional liquidity support for First Republic emerged. The fact that Deutsche Bank's 5-year CDS premium, which surged last Friday, sharply dropped on Monday and stabilized also raised expectations for easing concerns in the banking sector."

As bank risks ease, anxiety is also subsiding. The Chicago Board Options Exchange (CBOE) Volatility Index (VIX), known as the 'fear index,' dropped from 26.14 on the 15th to 20.6 points on the 27th. The MOVE index, a volatility indicator for the U.S. bond market, also fell from 198 points to 161 points during the same period.

Jiyoung Han, a researcher at Kiwoom Securities, said, "Market anxiety, which once reached extreme pessimism, appears to be easing. Although related concerns such as another potential bank run may surface and increase market volatility in the future, the downside rigidity is unlikely to be compromised, so the index's downside (around 2300 for KOSPI) is expected to remain solid."

Trading Range Expected to Persist for the Time Being

The stock market is expected to continue in a trading range as upward and downward factors coexist.

Researcher Han predicted, "The easing of the small and medium-sized bank crisis due to First Citizens' acquisition of SVB and the weakening of the U.S. dollar are upward factors, while caution ahead of Micron's earnings announcement and concerns about semiconductor stocks are downward factors, resulting in a trading range movement."

Considering the index movements during past periods of increased volatility, it is expected that breaking out of the trading range will not be easy.

Yuna Choi, a researcher at Shinhan Investment Corp., explained, "Since 1990, there have been 18 periods of intensified historical volatility in the U.S. financial sector, excluding one-off cases. Except for financial crises that escalated into systemic risks, global stock markets commonly began to decline about 14 trading days before volatility intensified. After confirming increased volatility, emerging markets recovered more slowly than developed markets. In the case of the KOSPI, it took more than 30 trading days to confirm a rebound, and emerging markets remained in a trading range for 50 to 60 trading days." She added, "The sluggish nature of emerging market stocks delays the KOSPI's rebound and is why a sharp rebound in the index is difficult to expect in the short term."