[Weekly Market Outlook] How Far Will the US Treasury Yield Shock Go... KOSPI Shaken by Anxiety

As the U.S. Treasury bond yield surpassed 5%, causing the KOSPI to fall below the 2400 level, uncertainty in the domestic stock market is expected to intensify this week (23rd to 27th). The key issue is how long the anxiety driven by bond yield movements will persist.

According to the Korea Exchange on the 22nd, the KOSPI index closed at 2375.00 on the 20th, down 81.15 points (3.30%) from the previous week. This is the lowest level in seven months since March 21. During the same period, the KOSDAQ index closed at 769.25, down 53.53 points (6.50%).

On the 19th (local time), Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), stated, "Inflation is still too high," and added, "I do not think interest rates are at too high a level," leaving the possibility of further tightening open. As a result, the U.S. 10-year Treasury bond yield briefly surpassed 5.0% intraday for the first time in 16 years since the global financial crisis, acting as a negative factor for the stock market. Additionally, the war between Israel and the Islamic militant group Hamas in the Gaza Strip is becoming an economic threat worldwide.

Jerome Powell, Chair of the U.S. Federal Reserve (Fed), held a press conference at the Federal Reserve Bank in Washington DC after concluding the Federal Open Market Committee (FOMC) meeting on the 20th (local time). [Image source=Yonhap News]

NH Investment & Securities projected the weekly expected KOSPI fluctuation range to be between 2380 and 2480 points. The approaching year-end U.S. shopping season and the improving trend in the semiconductor industry are positive factors. On the other hand, geopolitical risks in the Middle East and concerns over rising long-term U.S. Treasury yields were cited as negative factors.

Kim Young-hwan, a researcher at NH Investment & Securities, said, "U.S. President Joe Biden's visit to the Middle East ended without significant achievements, and the risk from the Middle East situation is escalating," adding, "This could increase risk-averse sentiment in global financial markets." However, he emphasized, "Considering the practical interests of Middle Eastern countries, the possibility of escalation into an international war remains low."

Recently, U.S. consumer indicators have shown stronger-than-expected performance, and the upcoming full-scale year-end shopping season is raising some optimism. Researcher Kim said, "This is a factor that raises expectations for the U.S. inventory restocking cycle in the fourth quarter and the resulting improvement in Korean exports."

Kim added, "The rise in U.S. long-term Treasury yields and the escalation of Middle East geopolitical risks are variables that could cause a short-term undershoot in the stock market," but also noted, "Since the tone of Federal Reserve officials' remarks has softened after the September Federal Open Market Committee (FOMC) meeting, and the possibility of the Israel-Palestine conflict spreading remains low, the additional adjustment in stock indices is more likely a 'short-term undershoot due to panic selling' rather than a 'shift to a downward trend.'"

Daishin Securities also viewed this shock as 'short-term.' They pointed out that the stance shift of Federal Reserve officials after the September FOMC and the recent surge in bond yields are based on 'economic momentum,' which could be interpreted positively. Lee Kyung-min, a researcher at Daishin Securities, said, "The recent bond yield level-up process is the result of a vicious cycle among psychological, supply-demand, and price variables being reactivated as economic factors joined the previously lingering fear," adding, "It is highly likely that the bond yield peak is passing through a short-term overshoot."