[Weekly Market Outlook] The Stock Market Between 'Short-Term Correction' and 'New Deal Breeze'

[Asia Economy Reporter Oh Ju-yeon] The US stock market is experiencing a correction due to a sell-off centered on technology stocks. Analysts attribute this to growing anxiety as the gap between corporate and economic fundamentals has been widening. Opinions are divided on whether this atmosphere marks the beginning of a new correction or is merely a temporary phenomenon. While there is consensus that market volatility is likely to increase in the near term, attention is drawn to the possibility of positive influences from the European Central Bank (ECB)'s accommodative policies and domestic New Deal initiatives.

On the 6th, Daishin Securities explained that the second week of September (7th?11th) requires attention to three key variables. The first is the stalled discussions on the fifth economic stimulus package.

Moon Nam-jung, a researcher at Daishin Securities, said, "Since Treasury Secretary Mnuchin proposed a mediation plan to agree on a $1.5 trillion level amid significant disagreements between the two parties over the stimulus size, this could serve as a foothold to advance bipartisan negotiations. However, since it inevitably takes time for the two parties to reach an agreement, noise is unavoidable," he forecasted.

The second variable is the ECB monetary policy meeting. Some suggest that the recent negative European consumer price inflation rate raises the possibility of easing.

Kim Sung-geun, a researcher at Korea Investment & Securities, explained, "The European consumer price inflation rate in August recorded a negative figure for the first time since May 2016, signaling an abnormal sign in terms of inflation. The ECB is expected to consider easing measures such as extending the Pandemic Emergency Purchase Programme (PEPP), which runs until June next year, and expanding the purchase scale."

Researcher Moon added, "While it is expected that the ECB will weigh the timing of additional stimulus measures to review the Eurozone economy and prepare for a resurgence of COVID-19, if voices within Europe calling for changes in inflation policy following the Federal Reserve's adoption of an average inflation targeting framework lead to additional policy implementation, the euro's strength will be limited. This could act as a factor to curb the dollar's weakness and weaken risk asset preference."

The third variable is crude oil prices. Due to the COVID-19 impact, crude oil demand recovery remains weak, and production cuts led by the Organization of the Petroleum Exporting Countries (OPEC) have been scaled down since August. Additionally, the driving season in the Northern Hemisphere has ended. These factors could increase oil price volatility, making coupling between oil prices and the stock market?an indicator of risk asset preference?inevitable.

Researcher Moon advised, "Considering these three variables, it seems the market sentiment will increasingly take a step back to assess the situation. Investors should adopt a wait-and-see attitude and use this as an opportunity to evaluate future market trends."

Meanwhile, interest in the K-New Deal Index is rising, and related industries and companies are expected to continue leading the market following the previous week.

Labor Gil, a researcher at NH Investment & Securities, said, "The stock market showed a favorable view toward growth sectors following the concretization of the Korean New Deal in July. The recent announcement of the New Deal fund formation and financial support plans is expected to rekindle interest in growth sectors such as secondary batteries, bio-health, internet services, and gaming."

He also emphasized that among the 40 stocks included in the K-New Deal Index announced by the Korea Exchange, 19 are KOSDAQ stocks, representing a relatively large portion. Considering that the five K-New Deal indices have a significantly high proportion of large-cap stocks by market capitalization, it is judged to be more favorable to KOSPI than KOSDAQ. Taking into account the expected strength of large domestic semiconductor stocks due to rising semiconductor spot prices, large-cap stocks are expected to perform relatively better than small- and mid-cap stocks.

However, he noted that the possibility of a slowdown in the dollar's depreciation pace could affect foreign investor flows, potentially offsetting some of the gains in large-cap stocks.

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