[Good Morning Stock Market] Tapering Pulls Down the Market... "Unfavorable Conditions to Persist for a While"

Concerns Over Tapering Approaching Within the Year
KOSPI Falls 6.6% From Its Peak

Bank of Korea Expected to Raise Interest Rates at August Monetary Policy Meeting
"Interest Rate Hike Impact Likely to Be More Concentrated on Vulnerable Groups"

[Image source=Yonhap News]

[Asia Economy Reporter Minji Lee] Amid lingering concerns over slowing economic growth, fears that tapering (asset purchase reduction) could occur within this year are dragging down the stock market. The KOSPI has fallen about 3.3% just this month, and securities firms expect a sluggish trend to continue until the exact timing and scale of tapering are clarified at the August Jackson Hole meeting or the September Federal Open Market Committee (FOMC) meeting.

Jung-hwan Na, Cape Investment & Securities Analyst: “KOSPI will not plunge below the psychological resistance level of 3,000 points.”

The domestic stock market decline that began last week is analyzed to be largely driven by fears that liquidity supply reduction, initially expected in the first quarter of next year, is approaching within this year, rather than unexpected negative factors. The release of the FOMC minutes brought the timing of tapering closer, intensifying the market’s reaction to negative news.

Although tapering is not a negative factor that damages expected earnings, the KOSPI’s 6.6% drop from its peak is considered excessive. This is because earnings forecasts for this year and next are expected to remain solid. In the short term, the clarification of the exact timing and scale of tapering at the August Jackson Hole meeting or the September FOMC could exert downward pressure on the market. However, after the September FOMC, when tapering plans are expected to be detailed, uncertainty over monetary policy will be resolved, potentially triggering a market rebound.

However, a rapid rebound in the short term may be difficult. The KOSPI is showing a downward trend as it falls below the past 120-day moving average level of 3,170 points. Nevertheless, considering that the current 12-month forward PER of the KOSPI index is lower than last February’s PER of 11.4 times, it is expected that the index will not plunge below the psychological resistance level of 3,000 points. Instead of selling, it is advisable to consider buying undervalued stocks with favorable earnings outlooks during this bottom-forming phase.

Sang-young Seo, Mirae Asset Securities Analyst: “US stock market affected by economic slowdown and reduced vaccine efficacy.”

The US stock market started lower due to tapering and COVID-19 issues but reversed to gains as bargain buying emerged. However, concerns over economic slowdown, COVID-19 spread, and semiconductor chip shortages influenced the market, ending the session mixed.

Concerns about economic growth slowdown were reemphasized last week by the shock in the US Consumer Sentiment Index and weak real economy indicators from China and the US. Amid this, the Federal Reserve’s indication of tapering within this year dampened overall investor sentiment.

[Image source=Reuters Yonhap News]

The announcement from Oxford University regarding COVID-19 vaccine efficacy after three months also added to the burden. According to the report, vaccines show strong initial effectiveness but their efficacy declines rapidly thereafter. Pfizer’s efficacy was 92% at 14 days but dropped to 78% after 90 days. Consequently, Pfizer (-1%), BioNTech (-8.84%), and Moderna (-5.84%) stocks, along with hotel, leisure, and airline sectors, showed weakness. Additionally, Ford, an automobile manufacturer, announced the closure of a pickup truck production plant due to semiconductor chip shortages, causing its stock to fall about 2.5%.

On this day, the domestic stock market is expected to perform poorly due to concerns over the US economic slowdown, the Fed’s tapering signals, and worries about vaccine efficacy. Furthermore, the weakness in international crude oil and non-ferrous metals such as copper, coupled with vaccine efficacy concerns, is expected to negatively impact foreign investor flows. However, sectors that experienced significant declines are likely to see bargain buying, leading to sectoral differentiation.

Gyuyun Jeon, Hana Financial Investment Analyst: “Fed may start tapering as early as year-end... Bank of Korea expected to raise interest rates in August.”

Next week, the Jackson Hole meeting (August 26?28) will be held. The theme is “Macroeconomic Policy in an Uneven Economy,” but the market is focusing on whether tapering timing will be mentioned at this conference. Fed Chair Powell, known for his dovish stance, is likely to maintain a cautious tone in his keynote speech. Since the July FOMC, COVID-19 cases have surged in the US, weakening economic expectations, and the US Economic Surprise Index has declined, weakening momentum.

The US Fed is expected to assess the economic impact of variant virus spread and the extent of workers returning to the labor market after the early September end of additional unemployment benefits. It is anticipated that tapering guidance will be provided at the September or November FOMC, with tapering starting as early as year-end or by early next year at the latest.

The Bank of Korea is also highly likely to raise the base interest rate at the August Monetary Policy Committee meeting, citing financial imbalances and inflationary pressures. With accommodative financial conditions, household loans increased by about 144 trillion KRW year-on-year in the first quarter of this year, and domestic housing prices have risen more than 10% compared to last year due to low interest rates and increased housing demand.

However, since income deterioration due to COVID-19 has been more severe for self-employed and low-income groups, the shock from interest rate hikes may also be concentrated on vulnerable groups. As social distancing measures continue, the economic conditions of vulnerable groups, including the self-employed, have not improved, so interest rate hikes could exacerbate income inequality. The Bank of Korea’s dilemma over monetary policy normalization is expected to deepen between resolving financial imbalances and the concentrated impact on vulnerable groups.

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