[Weekly Market Outlook] Concerns Over 'China's Economic Slowdown + US Interest Rate Hike'... Unstable KOSPI

This week (21st-25th), the domestic stock market is expected to experience increased volatility due to concerns over China's economic slowdown and the possibility of further interest rate hikes in the United States.

According to the Korea Exchange, on the 18th, the KOSPI index closed at 2504.50, down 86.76 points (3.35%) from the previous week’s 2591.26 in just one week. During the same period, the KOSDAQ index also fell 34.88 points (3.82%) to close at 877.32.

The reason for the domestic stock indices’ weakness is growing concerns about China’s economic slowdown. According to the National Bureau of Statistics of China, July retail sales and industrial production increased by 2.5% and 3.7% year-on-year, respectively, both falling short of the previous month’s figures and forecasts. Additionally, China recently announced it would stop releasing youth unemployment rates, which had surged to 21.3%, further increasing economic uncertainty. Doubts about the Chinese government’s economic stimulus measures also negatively affected the market.

Amid this, Country Garden, a Chinese real estate developer, failed to pay interest on its dollar bonds, raising default concerns. If interest is not paid within the 30-day grace period, the company will officially declare bankruptcy. Another developer, Sunac, also failed to pay interest on bonds maturing in 2024, rapidly intensifying concerns about a downturn in the overall Chinese real estate market and strengthening risk-averse sentiment.

Researcher Na Jeong-hwan said, "Due to default concerns among Chinese real estate developers, the yuan-dollar exchange rate reached a year-high of 7.34 yuan, and the won-dollar exchange rate also hit the 1340 won level. At the same time, as concerns over China’s economic slowdown increased, investors’ risk-off sentiment strengthened, causing stock prices to weaken. In the short term, if noise from the Chinese real estate sector arises, downside volatility in stock prices may expand."

However, Na added, "Chinese authorities may intervene policy-wise to prevent a chain of defaults among real estate companies and to curb the weakening trend of the yuan exchange rate. During the yuan depreciation in 2015, the People’s Bank of China intervened to defend the yuan’s weakness." He reminded that "although such intervention will not fundamentally improve China’s economy, the downward pressure on stock prices caused by negative news from China will gradually ease." NH Investment & Securities projected the weekly expected KOSPI range to be between 2470 and 2630 points this week.

Daishin Securities analyzed that the global financial market is at a critical turning point this week. Researcher Lee Kyung-min said, "Currently, securing support at the KOSPI 2480 level (200-day moving average) is key. The trigger for a sentiment reversal includes the recovery momentum of Korean exports from August 1 to 20, the visibility of China’s stimulus policies, and U.S. economic indicators falling short of expectations. It is important to see whether the rise in bond yields is controlled and whether pressures from a strong dollar and weak yuan and won ease."

Recently, U.S. Treasury yields have risen to their highest levels of the year, intensifying concerns about further U.S. interest rate hikes. Attention is focused on Federal Reserve Chair Jerome Powell’s remarks at the Jackson Hole meeting scheduled for later this week. The minutes from the July Federal Open Market Committee (FOMC) revealed that most Fed officials expressed hawkish views, showing caution about upside inflation risks, which has brought monetary tightening uncertainties back into focus. Kiwoom Securities researcher Kim Yu-mi said, "The Fed’s monetary tightening stance is expected to continue at the Jackson Hole meeting, which could stimulate volatility in interest rates and exchange rates," but added, "Currently, the market consensus still favors a rate hold at the September FOMC."

She continued, "If the outlook for a rate hold in September weakens further after the Jackson Hole meeting, the upside risk for Treasury yields will increase, raising concerns about the side effects of high interest rates. Until monetary tightening uncertainties ease at the September FOMC, it is necessary to keep the possibility of increased volatility in interest rates and exchange rates open."