[Good Morning Stock Market] US Credit Rating Downgrade... KOSPI Expected to Open Lower

On the 19th, the KOSPI is expected to start lower due to the aftermath of the downgrade of the US credit rating.

Last Friday, at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 42,654.74, up 331.99 points (0.78%) from the previous session. The S&P 500 rose by 41.45 points (0.70%) to close at 5,958.38, and the Nasdaq Composite ended the session at 19,211.10, up 98.78 points (0.52%).

Despite heightened volatility due to options expiration, a sharp decline in the preliminary University of Michigan Consumer Sentiment Index, and a rise in expected inflation, the New York stock market ended with a weak start but strong finish, as optimism over tariff negotiations offset negative factors. The preliminary University of Michigan Consumer Sentiment Index for May, released that day, came in at 50.8 points, below both the previous month (52.2) and the consensus (53.1). One-year expected inflation also surged (6.5% in April to 7.3% in May). This indicates that uncertainty surrounding tariffs continues to keep consumer sentiment cool and inflation concerns elevated.

After the market closed, credit rating agency Moody's announced its decision to downgrade the US sovereign credit rating by one notch, from 'Aaa' to 'Aa1', citing fiscal deficit and debt ratio issues. As a result, some foreign media reported that a 'sell-off of US assets' could resume, raising the possibility of a negative shock to stock prices after the market opens today.

In fact, on the day of S&P's downgrade of the US credit rating in August 2011, the S&P 500 and KOSPI plummeted by 6.7% and 3.8%, respectively, and it took 40 trading days for the S&P 500 and 34 trading days for the KOSPI to find their bottoms. On the day of Fitch's downgrade of the US credit rating in August 2023, the S&P 500 and KOSPI dropped sharply by 1.4% and 1.9%, respectively, and it took 62 trading days for the S&P 500 and 59 trading days for the KOSPI to confirm their lows.

However, Fitch's downgrade in August 2023 occurred two months after the outlook was revised downward, and since the market had already experienced the negative impact of a credit rating downgrade, the magnitude of the drop was not as severe as in August 2011. This latest downgrade by Moody's, which comes a year and six months after the outlook was revised downward in November 2023, is more of a 'pre-announced downgrade.' It is also noteworthy that the market has learned from two previous downgrades.

Han Jiyeong, a researcher at Kiwoom Securities, stated, "Currently, there is a demand vacuum caused by tariffs and resulting difficulties in earnings estimates, and there are also burdens from policy uncertainties at the US Federal Reserve. However, given that the US and other countries, including China, have entered into tariff negotiations, and that there is valuation rigidity on the downside compared to previous credit rating downgrades, it is appropriate to incorporate these factors into response strategies."

He added, "Ultimately, while Moody's credit rating downgrade may serve as a catalyst for a market correction, it is likely to be limited to a trigger for short-term profit-taking that has accumulated during the recent rapid rebound on tariff negotiation expectations. Therefore, although major indices such as the KOSPI, KOSDAQ, S&P 500, and Nasdaq are expected to start under downward pressure after the market opens today, it is advisable to refrain from responding by significantly reducing equity positions."