[Good Morning Stock Market] "Stagnant Market Amid Concerns Over Economic Cycle Peak... Korean Stock Market Options Expiration Day"

Controversy Over Market Peak in Gyeonggi Dampens Investor Sentiment

Korean Stock Market Likely to See Continued Weak Investor Sentiment
Volatility Expansion on Options Expiration Day Mainly Driven by Institutions

[Image source=Yonhap News]

[Asia Economy Reporter Minji Lee] As concerns grow that the U.S. economic cycle has reached its peak, the stock market is showing sluggish performance. Additionally, fears over the spread of the Delta variant virus are dampening investor sentiment. Some analysts suggest that while the pace of economic activation may slow somewhat, growth has not stopped, so the extent of stock price corrections is not expected to be significant.

Sangyoung Seo, Researcher at Mirae Asset Securities: “On options expiration day, institutional investors’ net selling of spot stocks should be monitored.”

The U.S. stock market started higher with large tech stocks gaining strength due to falling Treasury yields, but investor sentiment weakened amid debates over the peak of economic expansion. The Federal Open Market Committee (FOMC) minutes, which had been a major concern for the market, did not show a more hawkish stance than last month, thus having little impact on financial markets. The Dow Jones Industrial Average rose 0.3%, while the Nasdaq and S&P 500 increased by 0.01% and 0.34%, respectively.

The domestic stock market is expected to enter a preparation phase for the earnings season, following the trend seen in the U.S. market. Considering the decline in U.S. Treasury yields due to the sluggishness in the electric vehicle sector after China's Didi Chuxing regulations, falling international oil prices, and concerns over slowing economic expansion, investor sentiment is predicted to remain weak.

Furthermore, attention should be paid to supply and demand dynamics on options expiration day. Given that cumulative net selling of individual stock futures by financial investors has been observed, there is a high possibility of net buying in the spot market. However, if rollovers are not conducted, net selling in the spot market due to liquidation is likely.

Sunghwan Kim, Researcher at Shinhan Financial Investment: “Concerns over passing the peak of economic expansion are excessive.”

Recently, concerns have increased that the U.S. economic momentum has peaked (peak out). The ISM Manufacturing Index and inflation rate are representative indicators fueling market worries about a slowdown. Considering past cases, the pace may slow somewhat, but the trend of the economy and earnings is expected to continue upward. The notion of momentum peaking is merely a concern about the slowing pace of improvement, not that the absolute levels of business conditions, inflation, or EPS are retreating.

It is necessary to adapt to the slowing pace. Historically, when the economy transitions from recovery to expansion, the strength of economic momentum tends to decline gradually. After the third quarter, when base effects and reopening effects fade, indicators are likely to slow down.

May 2004 and April 2010 showed trends similar to the current stock price movement. At that time, the pace slowed somewhat, but the trends in the economy and earnings continued upward. Supported by fundamentals, stock prices also showed strong resilience. It took about three months to confirm the bottom, and the average correction was around 8%. Debates over economic momentum and increased stock price volatility are growing pains that must be experienced at least once.

The U.S. economy is still in a position looking upward. Even if growth slows somewhat, it is not an absolutely slow growth rate. Growth exceeding the historical average (2.5%) is expected through the first half of next year, and there is potential to rise more than 2% compared to potential GDP. This is why it is difficult to agree with theories of stock market correction and a half-year trend skewed toward growth stocks. Focus should be on trends and direction rather than peak out debates.

Sanghyun Park, Researcher at Hi Investment & Securities: “Fed unlikely to easily open tapering exit.”

Amid claims that the U.S. economic cycle has peaked, the spread of the Delta variant virus is likely to delay the Federal Reserve’s tapering signals. According to the U.S. Centers for Disease Control and Prevention (CDC), as of the 19th of last month, the Delta variant accounted for 26% of new cases in the U.S., but this month it is estimated to account for 50%. The proportion of the Delta variant has doubled every two weeks.

Although the number of new cases in the U.S. is not rising sharply, considering that 99% of new cases in the UK last month were the Delta variant, there is a high risk of a surge in cases.

While the likelihood of a pandemic situation similar to last year is low, the spread of the Delta variant virus inevitably has a negative impact on the U.S. economy, especially the labor market. Although the Fed’s tapering is necessary to curb overheating in asset prices such as housing and stocks, the Fed cannot overlook the risk of delayed economic normalization due to uncertain circumstances. In conclusion, given the increased uncertainty risk related to COVID-19, it is unlikely that the Fed will easily open the tapering exit.

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