[Market ING] Box Range Market Expected Due to Profit-Taking and FOMC

2600~2750 Range Box Fluctuation Outlook
Focus on June 21 FOMC and Dot Plot Changes

The stock market this week (March 18-22) is expected to show a box range movement due to the March U.S. Federal Open Market Committee (FOMC) meeting and profit-taking.

Last week, the KOSPI fell by 0.5%, while the KOSDAQ rose by 0.83%. The KOSPI raised expectations for a rise by recovering the 2700 level for the first time in 23 months last week, but it sharply dropped 1.91% on the 15th, retreating back to the 2660 level.

[Image source=Yonhap News]

Jinhyuk Kang, a researcher at Shinhan Investment Corp., analyzed the sharp drop in the KOSPI on the 15th, saying, "When the U.S. February Consumer Price Index (CPI) exceeded expectations, bonds weakened but stocks cheered Oracle's optimistic guidance. However, after the Producer Price Index (PPI) also exceeded expectations following the CPI, inflation concerns seem to have spread again in the stock market."

The U.S. February PPI, released on the 14th (local time), rose 0.6% month-on-month, surpassing the expert forecast of a 0.3% increase. Year-on-year, it rose 1.6%, also exceeding the market forecast of 1.1%, marking the highest increase since August last year. Younghwan Kim, a researcher at NH Investment & Securities, explained, "The PPI significantly exceeded the consensus (average securities firm forecast), highlighting concerns about delays in the start of the Federal Reserve's rate cuts and a reduction in the number of cuts within the year. As a result, the 10-year U.S. Treasury yield rose sharply, and the foreign exchange market saw a stronger dollar and weaker Korean won. Foreign investors recorded net sales of 1.0352 trillion KRW in the securities market."

Additionally, Kim cited concerns related to corporate value-up programs and risks from China's low-price electric vehicle competition as causes of the KOSPI decline on the 15th. At Samsung C&T's regular shareholders' meeting on the 15th, shareholder return proposals from five activist funds (KRW 4,500 dividend per share, KRW 500 billion share buyback) were rejected, dampening investor sentiment in low price-to-book ratio (PBR) stocks that had risen on expectations of corporate value-up programs. Wells Fargo lowered Tesla's target price citing global electric vehicle demand slowdown and China's low-price competition. Kim said, "Because Chinese electric vehicle companies use Chinese secondary batteries, Wells Fargo's report negatively affected investor sentiment toward Korean secondary battery stocks."

However, since the inflation trend is not expected to change and the declines in low PBR and secondary battery stocks appear to be profit-taking, it is advised to respond with buying during price adjustments. Kim said, "The biggest risk factor for the stock market going forward is inflation instability and the resulting delay in Fed rate cuts. But currently, the downward stabilization of the inflation path is not judged to be compromised, and adjustments in stocks related to corporate value-up programs and secondary batteries are more of a profit-taking nature following price increases rather than new shocks to stock prices." He added, "It is appropriate to respond with buying during price adjustments caused by these factors."

The KOSPI is expected to fluctuate within a box range of 2600 to 2750 for the time being. Kyungmin Lee, a researcher at Daishin Securities, said, "At this point, further KOSPI level-ups are considered difficult. Although some expectations for China's economic recovery and U.S. rate cuts have been factored in, they are not excessive, and recently, rate cut expectations have retreated again due to the CPI impact, so the adjustment range will be limited."

He suggested that rather than aggressive overweighting, rotation trading is necessary. Lee explained, "Above the KOSPI 2700 level, rotation trading is needed rather than aggressive overweighting strategies. It is necessary to focus on short-term trading based on price merits within export and growth stocks, targeting semiconductors, secondary batteries, pharmaceuticals & bio, and internet sectors."

Key schedules this week include China's February retail sales, industrial production, and fixed asset investment on the 18th; the U.S. March FOMC and February Conference Board Leading Economic Index on the 21st; and Korea's February PPI release on the 22nd.

Lee said, "The FOMC results will be announced at 3 a.m. on the 21st, and it is highly likely that the dot plot will maintain three rate cuts in 2024 and four in 2025. Economic forecasts are expected to be revised upward, and inflation forecasts are also likely to be revised downward."

Any changes in the dot plot are expected to inevitably impact the market. "If the dot plot is revised downward, a shock to the overall financial market is unavoidable. Even if the 2024 dot plot is maintained, if the 2025 dot plot is revised downward, financial market shocks must be considered," he said. "If the dot plot is maintained, the distribution of Fed members' dot plots, Fed Chair Jerome Powell's press conference, and discussions on quantitative tightening (QT) could influence investor sentiment," he added.