[Weekly Market Outlook] COVID-19 vs Policy Landscape... High Volatility Inevitable for the Time Being

Monetary and Fiscal Policy Time Lag Makes Stock Market Volatility Inevitable
Cape Investment & Securities "KOSPI Band Expected at 1720~1830 This Week"

[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] As the impact of the novel coronavirus infection (COVID-19) continues for an extended period, financial market instability is expected to persist this week as well. Before COVID-19 is brought under control, it is difficult to implement aggressive fiscal policies, so the situation requires relying on central banks' monetary policies. Analysts predict that financial variables such as stock prices will exhibit high volatility amid this time lag between policies.

Following the historic crash on the 13th, when the KOSPI fell below 1700 and the KOSDAQ below 500, concerns are expected to continue this week (16th?20th). Seungmin Yoo, a researcher at Samsung Securities, explained, "Because there were no similarities to past recession conditions, the financial market's response to COVID-19 was considered excessive, and the U.S. Federal Reserve (Fed) lowered the benchmark interest rate by 50 basis points (1bp = 0.01 percentage points), but the expectation that the financial market would stabilize was largely off the mark. The core issue was the spread of the infectious disease."

The current situation is diagnosed as making swift government decisions difficult. If aggressive policy responses are used early to exhaust various measures before COVID-19 is controlled, there may be limits when policy support is actually needed. Ultimately, it is analyzed that central banks' monetary policies will have to take precedence. Researcher Kim stated, "Monetary authorities will focus on preventing the spread of financial risks by lowering policy rates and supplying liquidity to the market for the time being. Central banks in regions with policy leeway, like the Fed, will continue to deliver messages aimed at market stabilization by implementing additional bold rate cuts, but large-scale fiscal expansion policies that the market is waiting for are likely to be delayed."

This time lag is expected to cause high volatility in the stock market. Researcher Kim explained, "During the period when accommodative monetary policies are implemented and government policies are announced, risky assets will begin to recover from oversold conditions. However, since the number of COVID-19 confirmed cases is expected to surge in major advanced countries for the time being, concerns about this will hinder the trend recovery of risky assets." Currently, global stock markets have entered oversold levels, but full recovery will require some time, and high volatility is expected to continue.

Younggyo Yoon, a researcher at Cape Investment & Securities, suggested a KOSPI expected band of 1720?1830. Aggressive policies by the U.S. Fed could be an upward factor, but the prolonged COVID-19 situation may offset this. Researcher Yoon explained, "As COVID-19 has been declared a pandemic, it is likely to be prolonged, and thus a highly volatile market will persist for the time being. However, since the market has fallen beyond the technical definition of a bear market (a 20% correction from the peak), the possibility of low-price buying inflows cannot be ruled out."

This content was produced with the assistance of AI translation services.