[Good Morning Stock Market] Entering a Pause with Volatility in 3Q

Uncertainties Persist Including US Presidential Election and US-China Tensions
Emerging Markets' COVID-19 Risks Also Require Attention
Economic Reopening Underway but Corporate Earnings Recovery in Question

[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] In the third quarter ahead of the U.S. presidential election, conflicts between the United States and China are expected to intensify, increasing uncertainty. Given that the novel coronavirus infection (COVID-19) is still rampant, an analysis suggests a pattern of 'a pause accompanied by volatility' will emerge.

◆ Namjung Moon, Researcher at Daishin Securities = The investment environment in the second half of this year will be a phase where the winner of the new Cold War era and the winner of the existing hegemon, the U.S. presidential election, will determine the direction of the global stock market. Considering the widening gap between the real economy and finance since the March bottom, the third quarter is expected to be a phase of pause accompanied by volatility, and the fourth quarter is expected to follow an upward path based on expectations for the policies of the next U.S. administration.

The U.S.-China relationship, the most important bilateral relationship in the international community, will proceed as a relationship of repeated competition rather than cooperation amid growing U.S. concerns over China's rapid rise and increasing Chinese suspicion of U.S. containment and pressure. In particular, ahead of the November election, U.S. President Donald Trump and his administration are expected to focus on exploiting China's weaknesses to regain support.

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Since the 2018 trade war, the U.S.-China relationship has been complex due to differences in national power and economic interdependence, making it difficult for one country to completely dominate the other. However, the U.S. is likely to maintain a relative advantage over China. Reasons for continued preference for U.S. assets include ▲ the scale of economic and military power ▲ China's passive stance in its relationship with the U.S. to resolve domestic issues ▲ confirmation of the rapid recovery of the U.S. economy and stock market after past crises ▲ potential to foster new industries.

◆ Jaeseon Lee, Researcher at Hana Financial Investment = Major emerging countries are resuming economic activities. According to Google's mobility data, India, which officially lifted its lockdown at the end of last month, still shows low movement in retail locations (restaurants, cafes), but population movement in other areas such as grocery stores and public transportation is recovering to pre-COVID-19 levels. Brazil shows a similar pattern. Population movement has been observed in places other than retail and grocery stores. Russia also shows a gradual recovery in population movement to pre-COVID-19 levels after lifting its lockdown at the end of last month. Emerging countries intend to continue easing lockdown measures going forward.

The problem is that the spread of COVID-19 is still ongoing independently. However, considering the strong economic normalization intentions of governments worldwide, the possibility of re-lockdowns is low. For emerging countries, COVID-19 is now approaching a symbiotic relationship rather than fear. Brazil has the second highest number of confirmed COVID-19 cases after the U.S., with about 40,000 new cases daily as of the end of June. Russia has recorded 630,000 confirmed cases, the second highest after Brazil.

Considering the deferred demand due to the COVID-19 shock, major economic indicators in emerging countries are likely to gradually improve in the third quarter. However, if the spread of COVID-19 is not contained within the year, domestic and external demand will disappear from the fourth quarter, and consumer sentiment is likely to shrink again. Companies will be more focused on debt repayment than investment. If the speed of economic recovery in a U-shaped form is low, it will also burden the financial markets, which are already decoupled from the economy. The liquidity-driven market led by the U.S. Federal Reserve (Fed) supports the downside of emerging market stocks, but signals of corporate profit improvement are still absent.

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