[Click eStock] "Start of Interest Rate Cut, Short-term Volatility Expansion is an Opportunity to Increase Weight"

Daishin Securities stated on the 19th that the interest rate cut cycle has begun following the 'big cut' decision by the U.S. Federal Reserve (Fed) Federal Open Market Committee (FOMC), and that the short-term increase in volatility presents an opportunity to increase exposure.

The Fed lowered the federal funds rate by 0.5 percentage points from 5.25-5.5% to 4.75-5.0% at the FOMC meeting held on the 18th (local time). Lee Kyung-min, a researcher at Daishin Securities, said, "This decision was in line with market consensus," but added, "Since most experts and economists had expected a 25bp (1bp=0.01 percentage point) rate cut, there are opinions that this was a bold decision, and doubts about the cause and authenticity of the 50bp rate cut have also increased."

Lee found the reason for the Fed's 'big cut' in changes to the economic outlook. While inflation forecasts were broadly and significantly revised downward, the GDP growth forecast for this year was lowered by only 0.01 percentage points. The unemployment rate was significantly revised upward. The statement expressed confidence in price stability while also mentioning uncertainty about the economic outlook. It was analyzed as a preemptive response to control economic and employment concerns in a situation where the rate cut cycle is starting based on the judgment that inflation is moving toward the Fed's target.

However, the gap between the market and the monetary policy and the scale and intensity of the rate cut, as well as lingering doubts about the economy and employment, remain as challenges. Fed Chair Powell said at the press conference that the 'big cut' decision was made considering several economic indicators added since the July meeting. He specifically mentioned being influenced by the report of a recession in the Beige Book. Regarding the pace of future rate cuts, he said, "The economic outlook summary does not indicate that the FOMC is in a hurry." He added, "We make decisions at each meeting based on incoming data, economic outlook developments, and the balance of risks," and stated, "If deemed appropriate, we may proceed more slowly." He emphasized that the economy remains solid and employment is in the process of normalizing, but evaluations suggest that confidence in the economy was weaker than his remarks at the Jackson Hole meeting. It was also analyzed that he failed to express a clear commitment to the rate cut cycle.

As a result, the U.S. financial markets, which had cheered immediately after the FOMC, became unstable again. U.S. bond yields, which had plunged, closed higher. After the FOMC, the 10-year and 2-year U.S. Treasury yields extended their declines to 3.645% and 3.56%, respectively, but reversed during the press conference, with the 10-year yield exceeding 3.7% and the 2-year yield surpassing 3.6%. The S&P 500, which had risen as much as +0.98% immediately after the FOMC, closed down -0.29%, and the Nasdaq also ended the session down -0.31% after rising as much as 1.16% during the session.

Researcher Lee Kyung-min explained, "From a broader perspective, in a situation that is not a recession, the development of a rate cut cycle tends to be a strong upward driver for global stock markets and risk assets," citing the cases of 1995, 1998, and 2019 as representative examples. Although the stock market fluctuated around the rate cuts amid debates about the economy and financial sector instability at those times, considering a 6-month to 1-year investment horizon, the market rose 20-30% from the lows.

The key after entering the rate cut cycle is whether the current economic situation moves toward a recession or a soft landing. At this point, the soft landing possibility is considered high. The preemptive big cut amid visible economic slowdown and employment weakness is seen as the Fed prioritizing risks and demonstrating its commitment to monetary policy normalization and preemptive action.

However, in a situation where distrust of the economy and fear of recession remain, time is needed to verify the U.S. economy. If the U.S. economy’s soft landing becomes clear through economic indicators in October and November, global stock markets and risk assets are expected to resume their upward trend.

In the short term, it is necessary to confirm the stance of the Bank of Japan (BOJ) on the 20th. The Fed’s big cut has opened the possibility of the yen-dollar exchange rate falling to the 135 yen level (yen appreciation). BOJ rate freeze is expected, but if the BOJ governor expresses a hawkish stance and politicians continue to make rate hike remarks during the Liberal Democratic Party leadership election campaign scheduled for the 27th, the pressure for yen appreciation could increase, leading to yen carry trade liquidation sales.

Researcher Lee expects attempts to rebound in the KOSPI to continue after the long Chuseok holiday. The key is whether the 2650-2660 level can be broken through and sustained. If sustained, a box range fluctuation is possible, but if it reverses downward due to resistance, there is also a possibility of securing support below the September low (intraday basis 2490 points).

From a medium-term perspective, the strategy to increase exposure is considered valid. Attention is drawn to sectors undervalued relative to earnings and sectors that have experienced excessive declines since July 11, such as semiconductors, automobiles, machinery, shipbuilding, software, IT hardware, and consumer staples. Lee advised, "There is no need to rush," and suggested, "From a short-term trading perspective, it is advantageous to focus on risk management above the KOSPI 2600 level and try to time bottom buying around late September to early October."