[Expert Urgent Diagnosis] Chaotic Stock Market... Overcoming 'Black Monday' Fear but Pessimism About Start of Bear Market Remains

Despite Over 3% Drop in New York Stocks Overnight,
Asian Markets Rally Amid Overestimated Declines
Mixed Optimism and Pessimism on US Recession Concerns

Amid fears of a recession originating from the United States, the New York Stock Exchange sharply declined across the board, while the KOSPI index opened at 2,533.34, up 91.79 points (-3.76%) from the previous trading day (2,441.55). On the 6th, the index was displayed on the electronic board in the dealing room of Hana Bank in Jung-gu, Seoul. Photo by Jo Yongjun jun21@

Asian stock markets, including South Korea, which experienced a 'Black Monday,' collectively rebounded on the 6th, leading to a relief rally. The previous day saw the worst trading session since the COVID-19 pandemic due to skepticism about U.S. artificial intelligence (AI) stocks combined with fears of a U.S. economic recession, but the market reversed in just one day. Despite the New York Stock Exchange falling more than 3% overnight, the market showed strength, consistent with experts' diagnosis that the sell-off was excessive. Regarding the root cause of fear?the U.S. recession concerns?market experts expressed both optimism, saying "there is insufficient evidence," and pessimism, calling it "the beginning of a downturn." Market volatility is expected to remain inevitable for the time being.

KOSPI Starts Up, Rising 91 Points

On the 6th, the KOSPI opened at 2,533.34, up 91.79 points (3.76%) from the previous close, expanding its gains to over 3% in the morning session. The KOSDAQ also opened higher at 709.04, up 17.76 points (2.57%). The sharp rise in both KOSPI and KOSDAQ triggered a simultaneous buy-sidecar early in the session. The sidecar is a mechanism that temporarily suspends program buying to reduce volatility when prices of KOSPI 200 futures surge. Major Asian markets also rose together, with Japan's Nikkei 225 index climbing more than 10%.

Although the New York Stock Exchange froze overnight due to the impact of the Asian market crash, the domestic market is believed to have rebounded based on the assessment that the previous day's decline was excessive. The three major indices in the New York stock market fell around 3% the previous day.

Domestic capital market experts responded that the previous day's 'panic sell-off' was excessive. The KOSPI dropped more than 230 points at the close due to foreign and institutional selling, marking the largest single-day decline in history. The Korea Exchange simultaneously triggered sell-sidecars and circuit breakers (CB) in both the KOSPI and KOSDAQ markets for the first time in four years. The index fell to an intraday low of 2,386.96, breaking below the 2,400 level. Market capitalization also evaporated by about 192 trillion won, breaking the 2,000 trillion won barrier. The KOSDAQ closed down 11.30% at 691.28 compared to the previous session.

Major Asian markets also suffered significant declines. Japan's Nikkei 225 index fell 12.4% in a single day, a larger drop than the KOSPI's 8.77%. Since former Prime Minister Shinzo Abe's administration through Prime Minister Fumio Kishida's tenure, Japan's stock market had maintained a high rally due to the 'Revitalization Strategy.' Taiwan's Taiex index also dropped 8.35%. Hee-chan Park, head of the Research Center at Mirae Asset Securities, said, "As I have continuously said, the previous day's plunge was excessive. Japan's market fell sharply, shocking the Asian markets, but excluding Japan, there is no reason for Asian markets to be shaken."

Divergent Views on 'Possibility of U.S. Recession'

Although the KOSPI temporarily succeeded in rebounding that day, opinions among experts were divided over the U.S. recession fears that triggered the crash. The recession fears spread after the July U.S. manufacturing contraction report and the previous month's U.S. unemployment rate rising to 4.3%. Additionally, the Bank of Japan's (BOJ) rate hike triggered the unwinding of the yen carry trade, leading to global capital outflows, coupled with concerns over an AI bubble, which triggered the sell-off. The risk of full-scale war between Israel and Iran also heightened, worsening investor sentiment.

Some market participants noted that evidence supporting recession fears is weak. Center head Hee-chan Park said, "Although recession talk is emerging, the reaction is excessive, and evidence for a recession is weak. The Federal Reserve's rate cuts may be accelerated and proceed more significantly than expected, which could lead to a rebound." Seung-young Park, head of investment strategy at Hanwha Investment & Securities, emphasized, "An unemployment rate in the 4% range and inflation in the 2% range are conditions for disinflation, not recession. When the U.S. economy fell into recession, employment decreased."

As the KOSPI index surged sharply in the early session, a sidecar (temporary suspension of program buy orders) was triggered, continuing the upward trend. On the 6th, the status of the Korean and Japanese stock markets was being broadcast in the dealing room of KB Securities in Yeouido, Seoul. Photo by Kang Jin-hyung aymsdream@

Seok-mo Yoon, head of the Research Center at Samsung Securities, said, "This sharp decline is likely the peak for this week," adding, "The mid-2,500s level of the KOSPI corresponds to a price-to-book ratio (PBR) below 0.9, a range where further declines are limited at this point." A PBR below 1 means the stock is trading at a price lower than the company's net asset value if all assets were liquidated.

On the other hand, pessimistic views that this is the early phase of a bear market also persist. Hyun-ki Kang, head of equity strategy at DB Financial Investment, said, "It is reasonable to see the recent U.S. market decline as just the beginning, not the end," warning, "When economic downturns begin, even if central banks enter a rate-cutting cycle, economic deterioration continues for some time, and stock prices continue to decline." Tae-dong Oh, head of the Research Division at NH Investment & Securities, said, "Debates over recession based on indicators such as the yield curve and unemployment rate will continue, but while the short-term plunge will recover to some extent, a box range or downward trend is inevitable until the U.S. presidential election."

There was also advice to focus on the unwinding of the yen carry trade rather than superficial economic slowdown concerns. Yong-gu Cho, a researcher at Shin Young Securities, said, "The bigger cause of the panic market is the unwinding of the yen carry trade due to yen strength," adding, "Currently, it appears that funds mainly invested in stocks are being released." He further noted, "Ultimately, the panic sentiment in the financial market will ease only after the USD/JPY exchange rate and the Nikkei index confirm support levels."

There was also a diagnosis that a strategy focusing on earnings-driven stocks is necessary for the time being. A common analysis is positive toward the semiconductor sector. Center head Hee-chan Park said, "I have said that it is necessary to focus on semiconductors, defense, energy power themes, and healthcare benefiting from rate cuts, and it remains effective to respond centered on these sectors. Semiconductors have inherently good earnings, so they can regain an upward trend, and the situation is not yet deteriorating."

Meanwhile, Deputy Prime Minister and Minister of Economy and Finance Sang-mok Choi held a macroeconomic and financial issues meeting (F4 meeting) that morning, stating, "Our economy is gradually showing signs of recovery, and the foreign exchange and capital markets are also showing favorable trends," urging, "Market participants need to be cautious about excessive anxiety spreading and make calm and rational decisions." The F4 meeting is a top-level meeting of financial leaders including Lee Chang-yong, Governor of the Bank of Korea; Kim Byung-hwan, Chairman of the Financial Services Commission; and Lee Bok-hyun, Chairman of the Financial Supervisory Service. The Presidential Office is also closely monitoring the situation. Although President Yoon Seok-youl began his summer vacation on the 5th, he reportedly received reports on the domestic market crash from his vacation spot and instructed on response measures. Presidential Office Policy Chief Tae-yoon Sung returned to the Presidential Office building, foregoing his vacation.