[Good Morning Stock Market] US Stocks 'Wobble' Amid Sharp Rise in Treasury Yields...Focus on Financial and Inflation-Benefiting Sectors

Sharp Interest Rate Surge Despite Powell's Fed Chair Remarks
Concerns Over Impact on Korean Stock Market...Focus Needed on Financial and Inflation-Benefiting Sectors
However, Not a Tightening Shift; Impact May Be Less Than Expected
Next Week's China Two Sessions in Focus...Expectations Rise for Commodities and Cyclical Sectors

On the 25th (local time), traders are handling their tasks on the trading floor of the New York Stock Exchange (NYSE) in the United States. (Provided by New York Stock Exchange) [Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] Despite expectations of economic recovery, the U.S. New York stock market plunged sharply, unable to withstand the impact of a rapid rise in Treasury yields. Although the domestic stock market is also expected to be affected, since this is a result of the economic normalization process driven by vaccines and stimulus measures rather than tightening issues, it is anticipated that the adjustment range in the domestic market will not be large. There is an analysis that attention should be paid to sectors benefiting from rising interest rates and inflation.

On the 25th (local time), the three major U.S. stock indices all fell. The Dow Jones Industrial Average dropped 1.75% to close at 31,402.01, the S&P 500 index plunged 2.45% to 3,829.34, and the tech-heavy Nasdaq index fell 3.52% to 13,119.43 compared to the previous trading day. This was the largest decline since the end of January last year.

The decline appears to be influenced by Treasury yields. The U.S. 10-year Treasury yield surged to 1.614% during the day, a level similar to mid-February last year before the widespread outbreak of COVID-19. Despite Federal Reserve Chairman Jerome Powell stating that tightening is not necessary because inflation pressures are not significant, market fears of inflation remained.

◆Sangyoung Seo, Kiwoom Securities Researcher= The U.S. 10-year Treasury yield exceeded 1.6% intraday for the first time since February last year, accelerating the pace of rate increases. The catalyst is estimated to be the improvement in the labor market, as new unemployment claims in the U.S. dropped significantly from 841,000 last week to 730,000. Early in the session, James Bullard, President of the Federal Reserve Bank of St. Louis, expressed confidence in the labor market, stating that "hiring is accelerating and the unemployment rate will soon be between 4.6% and 5.2%." Additionally, comments from Fed Chair Powell and Vice Chair Richard Clarida that the economy is recovering further stimulated the pace of rate increases.

Moreover, in the 7-year Treasury auction, the bid-to-cover ratio was 2.04 times, below the 12-month average of 2.45 times, and indirect bids accounted for 38.1%, significantly lower than the 12-month average of 63.6%. This sharp decline in bond demand is interpreted as accelerating the rise in yields. Although Fed Chair Powell argues that the likelihood of sustained inflation pressure is low, the bond market remains concerned about persistent inflation. As Treasury yields surpassed the S&P 500 dividend yield (1.51%), selling pressure emerged. However, even if Treasury yields rise to 1.75%, considering that 40% of companies have dividend yields exceeding this level, the possibility of a broad correction is low.

The sharp rise in U.S. Treasury yields poses a burden on the Korean stock market. Typically, when U.S. interest rates rise, capital flows out to the U.S., which can be negative for emerging market stocks. For example, on May 22, 2013, the Korean stock market fell 6.7% in June of that year alone following then-Fed Chair Ben Bernanke's remark that quantitative easing could be reversed. If the rise in U.S. Treasury yields accelerates, it could negatively affect foreign investor flows, causing sensitive reactions to downward factors.

However, as Fed Chair Powell and others have mentioned, the cause of the U.S. rate increase is not tightening but the economic normalization process driven by COVID-19 vaccines and stimulus measures. Therefore, the likelihood of a significant correction in the index is low. Interest rates are still low compared to pre-COVID-19 levels, and there are many long-term unemployed, so the possibility of Fed tightening is low. Also, unlike in 2013 when emerging markets had large current account deficits, vulnerabilities are much lower now, which can alleviate related concerns. Considering this, the Korean stock market may start with a sharp decline early in the session but is expected to see sectoral differentiation with a rebound centered on sectors benefiting from rising rates and inflation.

◆Namjoong Moon, Daishin Securities Researcher= From next week, a stock market uptrend that escapes the influence of rising interest rates is expected to begin. The rise in the U.S. 10-year Treasury yield largely reflects expectations of economic recovery. Since the scope for further rate increases is limited, market instability will gradually ease.

In the next one to two weeks, the U.S. 10-year Treasury yield could rise to around 1.5%, similar to February last year before the COVID-19 outbreak. The current rate increase reflects the economic recovery phase excluding crisis situations, so there is room for further increases. Also, since the bond market is discussing rising yields, it may increase the burden of rate hikes in advance (through selling). However, as this is an initial reaction to a new phenomenon, the impact is expected to be temporary.

Historically, rising rates based on economic recovery did not burden the stock market. Only when rate increases signaled tightening did they trigger market corrections. Since less than a year has passed since the crisis, fundamentals are not strong enough to justify tightening. From the Fed's perspective, which is responsible for full employment and price stability, the current unemployment rate (6.3% as of last month) supports a dovish monetary policy stance. It is time to increase exposure to stocks that will rise despite rising rates.

◆Daehun Han, SK Securities Researcher= Fed Chair Powell dismissed inflation concerns, but the effect has yet to be clearly seen. Since rising rates have dampened investor sentiment, attention to the direction of U.S. rates is necessary, and volatility expansion seems inevitable for the time being.

Nevertheless, individual investors continue to buy. They have net purchased about 27.3 trillion won this year and 4.9 trillion won this month alone. With liquidity still abundant, buying momentum will continue. In this process, the direction of interest rates will greatly influence investor sentiment, and since individual investors are the main force in supply and demand, volatility expansion will continue for some time.

Ahead of China's Two Sessions next week, there are expectations that a 25 trillion yuan (approximately 430 trillion won) stimulus package will be passed. Although expectations for China-driven investment have been high every year before the Two Sessions, this year, with reflation (escaping deflation but not reaching severe inflation), interest is even more focused. However, since there are no clear guidelines on the implementation period, excessive expectations should be avoided. If a 25 trillion yuan stimulus package is passed and detailed contents are announced, commodities and cyclical sectors along with reflation strength will continue, but if not, disappointment selling may occur.

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