[Good Morning Market] Delayed Economic Recovery... Dollar Strength Reminiscent of 2014 Tapering

All New York Indexes Fall... Short-Term Volatility Expansion Rather Than Trend Decline
Tapering This Year Likely to Strengthen Dollar in Mid to Long Term
Biden US Administration Considers Introducing Sustainable Aviation Fuel

[Image source=AP Yonhap News]

[Asia Economy Reporter Gong Byung-sun] As the recovery of the consumption-driven economy is delayed, the U.S. stock market showed a sluggish performance. Meanwhile, the value of the dollar is showing signs of rebound, with asset purchase tapering emerging as a mid- to long-term factor for dollar strength.

On the 17th (local time), all major New York stock markets declined. At the New York Stock Exchange, the Dow Jones Industrial Average closed at 35,343.28, down 0.79% (282.12 points) from the previous trading day. The S&P 500 index closed at 4,448.08, down 0.71% (31.63 points) from the previous session. The tech-heavy Nasdaq closed at 14,656.18, down 0.93% (137.58 points) from the previous day.

◆ Seo Sang-young, Researcher at Mirae Asset Securities = On the 13th, the U.S. consumer sentiment index recorded a level lower than during the COVID-19 pandemic last year, indicating a delay in the consumption-driven economic recovery. Amid this, the expansion of the COVID-19 Delta variant led to a retail sales report for July that significantly missed expectations. The U.S. retail sales announced that day decreased by 1.1% compared to the previous month.

However, items related to economic normalization showed improvement, indicating that the economic contraction is not clearly evident. Rather, industrial production demonstrated the economy’s robustness. July industrial production increased by 0.9% month-on-month, continuing the improvement trend. In particular, the factory operating rate recorded 76.1%, showing a solid performance.

Nevertheless, the sharp decline in the stock market is presumed to be due to increased profit-taking desires. Since stocks that had risen significantly were sold off, this is likely a short-term volatility expansion rather than a trend decline.

(Provided by Hyundai Motor Securities)

◆ Oh Chang-seop, Researcher at Hyundai Motor Securities = Contrary to financial market participants’ expectations this year, the value of the dollar is showing signs of rebound. After COVID-19 last year, the dollar index sharply declined from a peak around 103 to as low as about 89 by the end of the year. This is interpreted as due to the Fed’s large-scale dollar supply expansion after COVID-19.

However, this year, due to stronger-than-expected U.S. economic recovery momentum and inflationary pressures, the Fed’s monetary policy normalization has accelerated, causing the dollar to rebound from its bottom phase. In the second half of the year, the won-dollar exchange rate rose sharply, approaching around 1,180 won. The recent surge was significantly influenced by expectations of dollar strength and increased net selling of domestic stocks by foreign investors from a supply-demand perspective. Considering that the Chinese yuan has recorded a slight strengthening this year, the recent domestic exchange rate rebound can be attributed more to domestic factors than external ones.

The possibility of a tapering decision within this year is considered a mid- to long-term factor for dollar strength. During the U.S. tapering in 2014, the dollar strengthened, and emerging market financial markets experienced shocks due to capital outflows. Therefore, it is judged necessary to prepare for a shift to a dollar strength trend starting in the second half of this year.

◆ Kim Joon-seop, Researcher at KB Securities = Amid the carbon neutrality movement, fossil fuel companies are attempting low-carbon transitions using existing facilities. Energy companies such as ExxonMobil and Chevron are devising plans to manufacture renewable energy by repurposing refining facilities. In other words, instead of bearing the risks of large-scale production facility sales and renewable energy investments, they plan to use existing refining facilities to produce biofuels and Sustainable Aviation Fuel (SAF).

Following Europe’s legislative package ‘Fit for 55’ aimed at reducing greenhouse gases, the U.S. has also begun discussions on introducing sustainable aviation fuel. The Biden administration reportedly announced on the 10th that it is considering reducing the proportion of fossil fuels used in aircraft by 2050 and introducing SAF. Electrically powered aircraft are difficult to develop due to battery weight, and to reduce carbon dioxide emissions from aircraft, the use of SAF is inevitable.

However, the current price of SAF is 2 to 5 times higher than conventional jet fuel. The usage share of SAF is only about 0.05% of total aviation fuel demand, which is very low. Accordingly, Europe’s Royal Dutch Shell announced SAF using biomass and hydrogen, and France’s Total announced SAF using seaweed, showing gradual market expansion. The Biden administration also stated it would discuss SAF introduction with the aviation industry at the end of this month.

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