[Good Morning Stock Market] Awaiting Debt Ceiling Negotiations, 'Watchful'... Focus on Financial and Semiconductor Stocks

Growing Recession Concerns Amid Debt Ceiling Negotiation Stalemate
Biden and Republicans to Discuss Debt Ceiling Increase on the 16th

The market's attention is focused on whether the US debt ceiling negotiations will be resolved. Due to disagreements between the Biden administration and the Republican Party, concerns are growing in the market that a US debt default might occur. On the 15th (local time), the US stock market showed limited movement ahead of the debt ceiling increase talks scheduled for the 16th between President Joe Biden and congressional leaders.

Seosangyoung, Head of Media Content Division at Mirae Asset Securities: “Rises in Financial and Semiconductor Stocks Are Positive for KOSPI”

The US stock market showed limited movement amid ongoing concerns that uncertainty over the debt ceiling negotiations could further accelerate an economic recession. Although President Biden and congressional leaders are set to negotiate the debt ceiling on the 16th, significant differences in their views suggest difficulties ahead. House Speaker McCarthy expressed concern, stating that “the White House and Democrats are not taking this issue seriously.”

On this day, financial and semiconductor stocks showed strength in the market. For financial stocks, news that some hedge funds increased their holdings in regional bank stocks in the first quarter was a positive factor. The hedge fund of Michael Burry, who predicted the subprime mortgage crisis, announced that it increased stakes in Bancorp (2%), Capital One (3%), Western Alliance (11.9%), and PacWest Bancorp (17.6%), driving gains in these stocks. Additionally, news that JP Morgan's delinquency rate decreased in April and that American Express's delinquency rate did not increase was also positive for financial stocks.

Regarding the semiconductor index, a market research firm, Vantage Market Research, forecasted an average annual growth rate of 8.8% in the semiconductor market through 2030, which was a positive factor. Micron surged 6.11%, and Western Digital, which is discussing a merger with Japanese semiconductor company Kioxia, rose 11.26%. The Philadelphia Semiconductor Index increased by 2.68%.

The domestic stock market is expected to rise, supported by strength in semiconductor and financial stocks. In particular, investor sentiment for SK Hynix is expected to improve due to Western Digital's acquisition of Kioxia. If Kioxia becomes part of Western Digital, the number of participants in the NAND market will decrease. Also, since the Bain Capital consortium, which includes SK Hynix, holds 49.9% of Kioxia's shares, SK Hynix is expected to have an opportunity to recover funds once the acquisition is completed.

However, limited movement is expected, similar to the US stock market. This is due to uncertainty surrounding the US debt ceiling negotiations and the expectation that upcoming US real economy indicators will be weak.

Kim Joongwon, Researcher at Hyundai Motor Securities: “The Debt Ceiling Negotiation Deadline Is July to August... No Sharp Stock Market Crash Expected”

Concerns are growing that a sharp stock market crash could occur if the debt ceiling negotiations are delayed, similar to the 2011 debt ceiling negotiations. In 2011, during the Barack Obama administration, the delay in debt ceiling negotiations led the global credit rating agency S&P to downgrade the US credit rating, and the US stock market plunged more than 6% on the day of the downgrade. The Republican-majority House and President Obama's upcoming re-election in 2012 were negative factors for the negotiations. Although the negotiations were resolved two days before the government's default deadline, it took seven months for the index and credit rating to recover to near pre-downgrade levels.

Treasury Secretary Janet Yellen has warned that the US government could default by June 1 if the current debt ceiling negotiations fail. If negotiations are not concluded by then, the US government will face a default crisis. The current debt ceiling negotiations are expected to be difficult due to the similar congressional composition as in 2011 and the upcoming re-election one year later.

However, the likelihood of a sharp crash like in 2011 is low. Above all, the current US economic fundamentals are considered stronger than in 2011. In August 2011, the US unemployment rate was 9%, reflecting prolonged aftereffects of the financial crisis and sustained high unemployment. Currently, the US unemployment rate is around 3%, indicating near full employment.

It is also important to consider that public opinion was negative toward the Republicans when market anxiety increased due to the failed 2011 debt ceiling negotiations. Additionally, the expected timing for a potential default is July to August. This is because quarterly tax inflows are expected around mid-June, and there is a $145 billion reserve for research and development. However, it should be noted that market volatility may increase until the negotiations are resolved.