[Good Morning Stock Market] Overheating Eases... Short-Term Correction as Sharp as the Surge

Strong performance expected after previous day decline
Short-term correction inevitable... Low likelihood of re-entering bear market

[Asia Economy Reporter Oh Ju-yeon] On the 15th, the domestic stock market saw the KOSPI and KOSDAQ indices plunge by 4.76% and 7.09%, respectively, returning the gains made in June due to concerns over the potential resurgence of COVID-19 and North Korea's military provocations. The securities industry anticipates a short-term cooling-off period to ease the recent overheating. However, opinions suggest that the likelihood of re-entering a bear market with a decline of over 20% is low.

◆ Eun-taek Lee, KB Securities Researcher = Since stock prices surged sharply in the short term, a rough short-term correction may also occur. However, I judge that the possibility of re-entering a bear market is not high. This is because economic expansion and the U.S. Federal Reserve's (Fed) easing policies are working together, discussions on additional U.S. fiscal policies are scheduled to begin in August, and there is standby capital around the stock market.

It is also worth noting that since 2010, the typical correction range of the KOSPI during periods when 'economic expansion + Fed easing policies' were in effect has generally been around -10% to -12%.

According to experts, the issue of COVID-19 resurgence cannot be considered safe until September. For the time being, public interest in the spread of COVID-19 is expected to increase. Recently, the volume of COVID-related searches on Google has stopped declining and is showing a slight rebound. In March, after the COVID search volume dropped, the stock market rebounded. When this interest on Google Trends calms down, it is highly likely that the stock price correction will conclude and a rebound will occur.

North Korea is expected to escalate the level of provocations in the future. However, it is difficult to see the situation as leading to a complete breakdown in relations with the U.S. and South Korea due to anti-North Korean leaflets, and it is more likely to be one of North Korea's negotiation strategies. It may also be a pressure tactic to bring President Trump, who is facing a red light for re-election, to the negotiation table.

In this regard, it is necessary to pay attention to the statement by Ri Son-gwon, which was not published in the Rodong Sinmun, rather than Kim Yo-jong's remarks. Despite various possibilities, the likelihood of increased tension on the Korean Peninsula is high for the time being, and it remains uncertain whether the U.S. will respond with a strong approach as usual or shift to dramatic negotiations.

◆ Sang-young Seo, Kiwoom Securities Researcher = The sharp drop in stock prices the previous day could trigger large-scale selling by foreigners due to concerns over delayed economic recovery and worsening corporate profits, creating supply-demand pressure. However, expectations of continued liquidity supply by the U.S. Federal Reserve (Fed) and other central banks worldwide have had a favorable impact on the market, so the Korean stock market is expected to be positively influenced on the 16th.

It is also expected that the upcoming congressional hearing of Fed Chair Powell in the evening will affect the Korean stock market. In particular, Chair Powell has argued about the bankruptcy risks of U.S. companies, and the monetary policy report submitted by the Fed to Congress also mentions bankruptcy risks for households and companies. Additionally, S&P's claim that "one-third of U.S. banks are vulnerable in credit ratings" poses a burden on the Korean stock market.

Considering these changing factors, the Korean stock market is expected to show strength, recovering from the previous day's decline, but gains are likely to be limited as investors await Chair Powell's speech. Especially in the U.S. stock market, companies expected to report poor earnings temporarily rose following the Fed's announcement but continued to face selling pressure and declined again. Given this focus on fundamentals, a rebound is expected mainly in Korean stocks with high expectations for earnings improvement.

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