[Weekly Market Outlook] Will the Stock Market Continue to Bottom Out... Attention Shifts to Earnings

The stock market this week (October 16-20) is expected to continue attempts to bottom out amid interest rate and war variables. As the third-quarter earnings season begins, market attention is likely to gradually shift from interest rates to fundamentals.

[Image source=Yonhap News]

Last week, the KOSPI rose by 1.97% and the KOSDAQ by 0.78%. It was a week that confirmed the influence of interest rates. Although a war broke out between Israel and the Palestinian armed group Hamas, the stock market reacted more sensitively to interest rates than to the war. Yoojun Choi, a researcher at Shinhan Investment Corp., said, "The armed conflict between Israel and Hamas was uncomfortable, but the impact of consecutive dovish (monetary easing preference) remarks by U.S. Federal Reserve (Fed) officials was greater," adding, "As they commonly argued that the current interest rate level is sufficiently restrictive and no further rate hikes are necessary, the U.S. 10-year Treasury yield, which had exceeded 4.8%, fell to 4.5%." He continued, "There is also a sentiment that the war issue is unlikely to spread throughout the Middle East, and the flight to safety buying of U.S. Treasuries due to uncertainty avoidance ultimately increased the possibility of the stock market bottoming out." The influence of interest rates was also evident after the release of the U.S. September Consumer Price Index (CPI). When the U.S. September CPI exceeded expectations and the U.S. 10-year Treasury yield rose again, the stock market, which had been rising for two consecutive days, turned downward.

Volatility in interest rates is expected to remain a concern. Jihyun Kim, a researcher at Kiwoom Securities, said, "The impact of this CPI is expected to be neutral, and the market is expected to smoothly enter the earnings season until the U.S. Federal Open Market Committee (FOMC) meeting on November 1," adding, "As Fed officials have recently mentioned, the rise in market interest rates brings about a tightening effect, which means the tightening environment for the stock market has eased." She added, "However, concerns going forward include whether the expansion and prolongation of the United Auto Workers (UAW) strike will cause cost inflation, and whether the confrontation between the Republican and Democratic parties until the temporary budget deadline on November 17 will cause interest rates to rise again."

As the third-quarter earnings season begins, the market is expected to gradually focus on fundamentals. Researcher Choi said, "Amid ongoing geopolitical noise, as the third-quarter earnings season begins, attention will shift from interest rates to fundamentals," adding, "Earnings announcements from U.S. financial stocks and Tesla are scheduled, which could significantly impact the stock prices of the secondary battery and electric vehicle value chain. It is necessary to confirm the contraction of credit expansion and the impact of asset price declines due to the sharp rise in interest rates through financial sector earnings."

Younghwan Kim, a researcher at NH Investment & Securities, explained, "The recent increase in remarks among some Fed officials that the need for additional tightening has decreased due to rising market interest rates is a factor that creates downside resilience in the stock market," adding, "Investors will pay more attention to the easing of interest rate pressures and positive news from individual companies such as semiconductor firms." NH Investment & Securities has set the expected KOSPI range for this week at 2420 to 2540.

Although there is hope for a bottom, there are still things to confirm to find direction. Researcher Choi said, "Until the FOMC blackout period (when Fed officials are prohibited from making public remarks), statements by Fed officials can move the market, and whether the war expands in the Middle East is important," adding, "Given that the U.S., Iran, and Saudi Arabia are negative about escalation, if Israel launches a ground offensive, war noise could intensify, so it is necessary to watch Israel’s response and the reactions of interested countries."

Key events to watch this week include the U.S. September retail sales and industrial production releases on the 17th, China’s September retail sales and industrial production, and third-quarter Gross Domestic Product (GDP) on the 18th, followed by the U.S. Fed Beige Book release, the Bank of Korea Monetary Policy Committee regular meeting, and the U.S. September Conference Board Leading Economic Index announcement on the 19th. Kyungmin Lee, a researcher at Daishin Securities, said, "U.S. September retail sales and industrial production are expected to slow compared to the previous month but continue growing; if they do not significantly exceed expectations, it will be favorable for the stock market," adding, "More importantly, China’s September industrial production is expected to grow 4.3% year-on-year, slightly down from 4.5% in August; retail sales are expected to grow 4.7% year-on-year; and fixed asset investment is forecasted at 3.2%, the same level as August, with consensus formed around these figures. This will confirm that China’s economy has passed its worst phase and entered a recovery phase."