G2 Joint Economic Slowdown... Financial Market Shock Amid Stagflation Concerns

Rising Coal Prices Cause Power Shortage in China... Production Disruptions Impact Global Economy
Powell: "Inflation Prolonged Beyond Expectations"... US Debt Ceiling Increase Talks Fail
Global Impact Leads to Sharp Drop in Korean Stock Market... Experts Say "No Further Sharp Decline Expected"

On the 29th, the KOSPI index on the electronic board of Hana Bank dealing room in Euljiro, Seoul, is showing a sharp decline compared to the previous day. Overnight, the U.S. stock market fell more than 2%, mainly in technology stocks, due to a rapid rise in Treasury yields. Photo by Mun Ho-nam munonam@

[Asia Economy reporters Park Byung-hee and Lee Min-ji] As the three major U.S. indices plunged sharply due to a surge in Treasury yields, the domestic stock market on the 29th also continued its downward trend, unable to escape the influence of the U.S. market. The previous day, the U.S. stock market continued its sharp decline, reflecting a combination of negative factors including concerns over prolonged inflation-driven interest rate hikes, delays in U.S. debt ceiling negotiations, and global production disruptions caused by China's power shortages. Additionally, negative sentiment spread regarding the semiconductor equipment sector, causing the tech-heavy Nasdaq index to fall 2.8% and the Philadelphia Semiconductor Index to drop 3.8%.

Is Stagflation Reemerging?

Amid growing concerns over a slowdown in the U.S. economy, China has also encountered an unprecedented power shortage, a sudden variable that is rapidly dimming the rosy outlook for the global economy. Forecasts that China's economy will slow due to power shortages have led to extreme pessimism, suggesting a reemergence of the stagflation era of the 1970s, when the oil shock plunged the global economy into recession.

On the 28th (local time), Bloomberg reported that rising energy prices are increasing inflation risks and delaying economic recovery from the COVID-19 impact, thereby heightening the risk of stagflation.

Oil prices surpassed $80 per barrel for the first time in three years, and in Europe, natural gas prices?which account for a significant portion of power generation?hit a seven-year high, driving energy costs up. The Bloomberg Commodity Index also reached its highest level in a decade. China's power shortage is exacerbating inflation risks.

Food prices are also soaring. The Food and Agriculture Organization (FAO) of the United Nations' global food price index has risen 33% over the past year. According to Bloomberg Economics, a 20% increase in commodity prices results in costs of at least $550 billion.

Jerome Powell, Chair of the U.S. Federal Reserve (Fed), testified before the Senate Banking Committee on the same day, stating, "Supply chain disruptions and labor shortages in companies may persist longer than expected," adding, "As a result, the high inflation trend may also last longer than anticipated."

Meanwhile, warnings are growing that both the U.S. and Chinese economies could slow simultaneously. Goldman Sachs lowered its U.S. economic growth forecast for this year from 6.4% to 6.0% last month, and further revised it down to 5.7% earlier this month. Major investment banks are also downgrading economic growth forecasts for China, which is experiencing power shortages.

Initially, central banks worldwide expected inflation to be inevitable this year due to a sharp economic recovery driven by expanded vaccine distribution. However, they believed inflation would be temporary and thus planned to continue accommodative measures such as quantitative easing. But as the inflationary trend has lasted longer than expected, calls to hasten the shift to tightening policies are increasing.

The U.S. is already facing growing concerns about economic slowdown due to the Federal Reserve's tapering (reduction of asset purchases). With inflation surging longer than expected, the Fed has announced plans to begin tapering in November. In the U.K., there are forecasts for a possible interest rate hike within the year, and even in the U.S., where rate hikes were expected only in 2023, the possibility of a rate increase next year is no longer ruled out. Jim Reid, investment strategist at Deutsche Bank, recently predicted that rising energy prices could accelerate central banks' tightening moves due to inflation concerns.

"Low Possibility of Further Sharp Declines... Weakening Sentiment for Growth Stocks"

Domestic securities firms expect the sharp decline to not continue. Han Ji-young, a researcher at Kiwoom Securities, said, "The domestic stock market had already priced in the negative factors that dragged down the U.S. market the previous day, so the possibility of further sharp declines is low," adding, "Regarding the U.S. debt ceiling negotiations, past cases suggest it is merely short-term political noise."

However, she analyzed that short-term investor sentiment toward growth stocks may weaken. The researcher explained, "Typically, stock markets have shown upward trends during periods of rising interest rates, but currently, the market is more burdened by the speed of rate hikes than their direction, leading to deteriorating sentiment particularly toward growth stocks with relatively high valuations."

Accordingly, investor interest in value stocks is expected to increase relative to growth stocks for the time being. Lee Eun-taek, a researcher at KB Securities, said, "As the third-quarter earnings announcement period begins, interest in value stocks with relatively strong earnings will grow," adding, "In the long term, small- and mid-cap growth stocks centered on eco-friendly and content sectors will show an upward trend, but in the short term, demand from investors seeking to realize profits by selling off will increase."

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