"'Gamestop'-Driven Short-Term Volatility Differs from 'Bubble Burst'... Fundamental Upward Momentum Remains"

US Retail Investor Raises Stock Price 1700% in One Month Against Hedge Fund Short Selling
Short-Term Volatility Spreads Globally... Korean Stock Market Also 'Turbulent'
Economic Recovery Optimism Effective... "Low Interest Rates and Stimulus Measures Provide Stable Environment"

On the 27th (local time), a pedestrian is passing in front of a GameStop store, a video distribution chain located in the Manhattan area of New York City, USA.
[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] Volatility triggered by the 'GameStop' phenomenon, where individual investors in the U.S. drove stock prices up in opposition to hedge funds attempting short selling, is sweeping through the stock market. While a decline in risk asset preference sentiment seems inevitable, analysts say the fundamental driving force behind the market's bullish trend has not been damaged. This is based on the expectation that additional stimulus measures are planned worldwide and COVID-19 vaccinations continue, maintaining low interest rates and optimism for economic recovery.

'GameStop'-Triggered Butterfly Effect... Spreading Market Volatility

On the 29th, the KOSPI closed at 2,976.21, down 3.03% (92.84 points) from the previous day. It fell below the 3,000 mark after four consecutive days of decline. The KOSDAQ also closed sharply down by 3.38% (32.50 points) at 928.73. Although it surpassed 1,000 for the first time in 20 years on the 26th, it showed rapid volatility. The VIX, which reflects expected volatility in S&P index option prices, surged to levels last seen at the end of November last year.

Analysis points to a significant impact from the U.S. video game retailer 'GameStop' stock price. Individual investors aggressively bought stocks that U.S. hedge funds had shorted, driving prices up, which caused hedge funds to incur massive losses and raised concerns about forced sales of other stocks. Short selling involves borrowing stocks to sell them in anticipation of a price drop, then buying them back at a lower price to return the shares. U.S. individual investors, opposing the overt short selling by hedge funds, united through social networking services (SNS) and drove the stock price up nearly 1,700% over a month. As a result, those who invested in GameStop short selling suffered total losses of $19.75 billion (approximately 22 trillion KRW) just this year.

Risk Asset Preference Weakens... Market Likely to Fluctuate Sharply Even on Minor Negative News

Not only GameStop but also other stocks like BlackBerry surged, causing losses for hedge funds. The movement of funds to cover losses is expected to somewhat dampen the global risk asset preference sentiment. Soeun Ahn, a researcher at IBK Investment & Securities, said, "There were concerns about overheating due to the sharp global stock market rebound after COVID-19, but this case involved individual investors gathered in online forums driving stock price surges through supply and demand, unrelated to corporate fundamentals." She added, "While it is unlikely that the irrational overheating will collapse like past bubbles, it clearly weakened the risk asset preference atmosphere." This means the stock market could be significantly shaken by factors that weaken economic recovery expectations, such as negative news related to COVID-19 vaccines or the U.S. Federal Reserve's downward economic assessments."

Therefore, there are calls to pay closer attention to domestic and international economic indicators to be released early next month. Since vaccine rollouts began in developed countries at the end of last year, some sentiment indicators reflecting investors' emotional expectations, such as consumption and investment, have improved, but the spread of virus variants and vaccine supply disruptions could weaken this trend. Researcher Ahn noted, "Lockdown measures in parts of Europe and Asia have been strengthened and extended, causing mobility indices to contract." She explained, "Since the COVID-19 outbreak, economic indicators have fluctuated according to the intensity of social distancing and lockdown measures, which could also burden the stock market."

Fundamental Upward Momentum Intact... Economic Recovery Expectations Remain

Although investment sentiment may contract in the short term due to the current atmosphere, the fundamental forces driving the market's upward trend remain intact. This is because, apart from the U.S. 'GameStop' incident, expectations for low interest rates and earnings recovery this year persist.

The U.S. Federal Reserve reiterated at this month's Federal Open Market Committee (FOMC) meeting that it is too early to discuss tapering (reducing asset purchases) and will maintain low interest rates. Although economic assessments were lowered due to uncertainties such as the spread of COVID-19 variants and vaccine supply concerns, this is interpreted as a commitment to continue accommodative monetary policy. Following the FOMC, U.S. Treasury yields also showed a downward stabilization trend. Market concerns about early tightening policies that have persisted since the beginning of the year are expected to ease.

Expectations for economic recovery also remain strong. The $900 billion stimulus package passed in the U.S. at the end of last year is currently underway. The Biden administration's $1.9 trillion stimulus package is also being pursued. Even if the stimulus size is reduced in Congress, the upward pressure on the U.S. domestic economy is expected to remain effective. This is because additional unemployment benefits and disaster relief payments included in the stimulus have relatively high economic stimulus effects. Since the current additional unemployment benefits are set to end in March, a new stimulus package is expected to be passed next month.

Expansion of COVID-19 vaccinations is also positive. Despite controversies over efficacy and supply disruptions, vaccinations continue. The International Monetary Fund (IMF) raised its global economic growth forecast for this year, reflecting the effects of vaccine distribution. Except for Europe, which suffered a significant COVID-19 resurgence during winter, growth forecasts for the U.S., Japan, and South Korea were all upgraded. Researcher Ahn predicted, "With vaccinations starting in South Korea next month and globally expanding, combined with the end of winter and the effects of stimulus measures, expectations for the recovery of economic fundamentals will continue."

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