[Weekly Market Outlook] Tightening Shadow Raises 'Volatility' Concerns... Q2 Earnings Season Brings 'Stock-Specific Market'

Concerns Over Fed's Additional Rate Hikes 'Burden'
Rising Optimism on China's Economic Stimulus 'Positive Factor'
Next Month's Earnings Season... Stock Selection in Focus

The domestic stock market this week (26th?30th) is expected to experience volatility due to the possibility of additional interest rate hikes by the U.S. Federal Reserve (Fed) within the year. However, since the magnitude of any further rate increases is expected to be limited, investor sentiment is likely to recover. With the Q2 earnings season approaching, a clear sector-specific market is anticipated depending on corporate earnings announcements.

[Image source=Yonhap News]

On the 25th, the securities industry cited concerns over additional Fed rate hikes and the global capital preference for the Japanese stock market as factors contributing to the domestic market’s decline this week.

The impact of Fed Chair Jerome Powell’s hawkish remarks is expected to increase volatility in the domestic stock market. On the 22nd (local time), during the Senate Banking Committee’s semiannual monetary policy report hearing, Powell stated, "The committee members feel it appropriate to raise rates about twice more this year." The Fed held the federal funds rate steady at 5.0?5.25% during the Federal Open Market Committee (FOMC) regular meeting but projected a year-end rate of 5.6%, indicating the likelihood of additional hikes within the year. Additionally, the global capital preference for Japanese stocks due to the weak yen is also a burden on the domestic stock market.

Hwang Junho, a researcher at Sangsangin Securities, said, "The impact of hawkish (monetary tightening preference) remarks will continue this week," and predicted, "The market will likely remain cautious for a while, with the index showing a sideways trend."

However, the securities industry believes that the scale of any additional rate hikes should not be taken too seriously. Kim Younghwan, a researcher at NH Investment & Securities, said, "Even if the Fed implements additional rate hikes, the magnitude will not be large," adding, "Investors seem to be using the rate hikes as an excuse to realize profits rather than fearing the hikes themselves, so after absorbing some selling pressure, investor sentiment will calm down."

The dialogue atmosphere between the U.S. and China and expectations for Chinese economic stimulus are positive factors for the domestic stock market. U.S. Secretary of State Tony Blinken visited China on the 18th?19th and met with President Xi Jinping. Market participants hope that this meeting between Secretary Blinken and President Xi will foster a dialogue atmosphere between the U.S. and China.

Furthermore, expectations for Chinese economic stimulus are also positive for the stock market. On the 20th, the People’s Bank of China cut benchmark interest rates, lowering the one-year and five-year loan prime rates, and fiscal stimulus measures are also anticipated. There is a high possibility that stimulus measures will be announced at the Chinese Communist Party Central Political Bureau meeting held in the last week of next month.

The domestic stock market is expected to be increasingly influenced by the earnings season going forward. Starting with Samsung Electronics’ preliminary earnings announcement on the 7th of next month, the Q2 earnings season for domestic companies will begin. Over the past month, the KOSPI’s Q2 operating profit consensus has been revised upward by 3.2%. Earnings forecasts for Q3 and Q4 have also improved, and since Q3 and Q4 earnings are expected to be better than Q2, market reactions to the Q2 earnings season are likely to be positive.

Researcher Kim Younghwan diagnosed, "If the visibility of corporate earnings turnarounds increases, we can expect a rebound in the stock prices of companies that have undergone a cooling-off period," and forecasted, "A sector-specific market is expected until the Q2 earnings season, amid foreign selling pressure." He added, "We prefer advanced sectors such as semiconductors, nuclear power, and defense, which are less likely to be negatively affected by changes in U.S.-China relations," advising, "Given the possibility of continued friendly news flow between the U.S. and China, Chinese-related stocks (cosmetics/apparel, steel) are also positive due to Chinese economic stimulus." He suggested a KOSPI expected band of 2530?2650 for this week.

Hana Securities expects a rotation market to continue, focusing on profit-taking in sharply risen stocks and stocks with room to rise compared to peers in the same industry. Hana Securities researcher Han Jaehyuk said, "We have observed a continuous decrease in market trading volume," and cautioned, "Due to the market’s ambiguous direction, investors are hesitant to take positions, so caution is required."

There was also advice that concerns about volatility should rather be seen as buying opportunities. Lee Kyungmin, a researcher at Daishin Securities, said, "Across Asian markets, including the domestic market, profit-taking pressure has increased, raising downward pressure on stock prices," but analyzed, "This correction is due to supply-demand factors, so it should be viewed as an opportunity to increase stock exposure."