[Good Morning Market] Aftermath of Fed Minutes Spurs 'Caution'... Expect Fluctuations Around Steady Range

[Image source=Yonhap News]

[Asia Economy Reporter Lee Seon-ae] On the 21st, the domestic stock market is expected to move within a narrow range. The New York stock market closed higher, supported by improvements in the weekly unemployment data. On the 20th (local time) at the New York Stock Exchange, the Dow Jones Industrial Average closed at 34,084.15, up 188.11 points (0.55%) from the previous session. The Standard & Poor's (S&P) 500 index rose 43.44 points (1.06%) to 4,159.12, and the tech-heavy Nasdaq index closed at 13,535.74, up 236.00 points (1.77%).

The market focused on the improvement in economic indicators such as the weekly unemployment data. Until now, concerns that the Federal Reserve's (Fed) accommodative stance might be adjusted due to inflationary pressures had led to corrections in tech stocks. Subsequently, worries about risk assets shifted to cryptocurrencies like Bitcoin. The Fed's April Federal Open Market Committee (FOMC) regular meeting, announced the day before, also suggested that policy adjustments could occur if the economy recovers rapidly, highlighting concerns about liquidity withdrawal. The minutes revealed that members stated it would be appropriate to begin discussions on adjusting the pace of asset purchases at upcoming meetings if the economy recovers quickly. Although many members still believe that level has not been reached, the market expects a rapid economic recovery over the summer due to improvements in employment and inflation indicators. New York market experts forecast continued volatility in the market for the time being. Shima Shah, Chief Strategist at Principal Global Advisors, told the Wall Street Journal that the market is very sensitive to inflation rates and the Fed, and volatility will persist until more economic data clarifies the situation.

◆ Seo Sang-young, Researcher at Mirae Asset Securities = Despite the collapse of the cryptocurrency market weakening risk asset preference, the Korean stock market showed resilience the previous day. This is presumed to be due to the stabilization of the U.S. stock market, where individual stocks with high expectations for earnings improvement strengthened in the latter part of the session. Notably, on that day, large-cap tech stocks, semiconductors, and medical device sectors showed strength in the U.S. market, while financials, industrials, and energy sectors underperformed.

This can be seen as a market adjustment where profit-taking from cyclical stocks, which had been strong since the beginning of the year due to expectations of economic recovery, led to buying interest in some growth stocks that had been weak compared to the start of the year. In the Korean stock market, this is expected to improve investment sentiment toward the electronics, electric and gas, and pharmaceutical sectors, which had been sluggish since the beginning of the year, while putting pressure on sectors such as textiles and apparel, steel and metals, construction, and banks that had shown strength. However, considering that related companies had already shown weakness the previous day, the burden is expected to be limited.

Given that growth stocks, which had shown clear earnings improvement but limited gains compared to the start of the year, led the rise in the U.S. stock market, it is expected that this trend will continue in the Korean stock market as well. The export-import statistics to be announced that day are also expected to be positive, with the electronics sector likely to lead, which is another factor suggesting a clear strength centered on growth stocks that had recently shown weakness.

[Image source=Yonhap News]

◆ Kim Sung-geun & Kim Dae-jun, Researchers at Korea Investment & Securities = The KOSPI is expected to move within a narrow range between 3,120 and 3,200. First, the April FOMC minutes were generally hawkish. The minutes included direct mentions of tapering. Some Fed members proposed that if the economy continues to recover rapidly, plans for tapering should be discussed at future meetings.

The market immediately reflected this outcome. The probability of interest rate hikes embedded in the futures market increased, government bond yields rose, and expected inflation declined. Inflation bets weakened. In the KOSPI, sectors benefiting from rising inflation, such as steel, copper-related stocks, and some food and beverage companies, showed weakness. As a result, movements preparing for tapering are expected to continue until the June FOMC, but the relative strength of cyclical sectors is likely to persist. However, whereas previously the strength was centered on materials, this time consumer goods or financials, which have risen relatively less, are more likely to respond. This is because even if expected inflation slows somewhat due to tapering, interest rates can continue to rise.

Furthermore, it is judged that the market has not fully shifted to a bearish phase due to these minutes. This is because the Fed still appears to be attentive to market liquidity. The minutes also included discussions about establishing a Standing Repo Facility. Most participants evaluated that the Standing Repo Facility could automatically alleviate sudden market pressures and is comparable to the Fed intervening on its own judgment. Although regular liquidity supply may decrease due to tapering, it can be interpreted that the Fed is prepared to supply liquidity again if market shocks occur.

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