[Good Morning Stock Market] "Rising Expectations for Resolution of US Political Uncertainty... Will KOSPI Attract Rebound Buying?"

US Top 3 Indexes Rise Simultaneously
Dow Up 0.92%, Nasdaq Up 1.25%

KOSPI Forecasts Strong Q3 Earnings
"Despite Good Earnings, Stock Momentum May Be Limited"
Inflation and Supply Chain Concerns Raise Next Year's Earnings Worries

[Asia Economy Reporter Minji Lee] As the three major U.S. indices closed slightly higher yesterday amid expectations for the resolution of political uncertainty and a rebound buying spree, there is a forecast that the domestic stock market may also see a slight rebound. However, since the earnings announcement period is approaching, it is predicted that selling pressure will appear mainly in some stocks.

Sangyoung Seo, Researcher at Mirae Asset Securities: “Expectations for the resolution of U.S. political uncertainty are expanding”

[Image source=AP Yonhap News]

The decline in the U.S. stock market is largely influenced by political uncertainty in the United States. Political uncertainty can be broadly categorized into three issues: debt ceiling negotiations, the $1.2 trillion infrastructure investment bill, and the $3.5 trillion social spending bill. Meanwhile, progressive Democratic lawmakers argue that the $3.5 trillion spending should be approved first before handling the $1.2 trillion infrastructure bill, while moderate-leaning lawmakers oppose the $3.5 trillion spending due to its excessive scale. The Republicans oppose both the suspension and increase of the debt ceiling.

Amid this, President Biden mentioned during a meeting with the House progressive group that the $3.5 trillion social spending bill needs to be reduced to between $1.9 trillion and $2.2 trillion. Until now, Democratic senators have rejected anything above $1.5 trillion, but on this day, they did not rule out the related spending scale, which was positively received. House Speaker Nancy Pelosi also supported the president’s remarks by announcing after a meeting with Senate Majority Leader Chuck Schumer and others that the amount should be less than $3.5 trillion.

President Biden’s proposal to reduce the scale and the positive remarks from moderate lawmakers are analyzed as favorable signals that could lead to the resolution of the infrastructure bill and debt ceiling negotiations. President Biden is scheduled to hold another Democratic leadership meeting on Tuesday evening, so it is necessary to continuously monitor related developments.

On this day, the domestic stock market is expected to show a different pattern from the previous day as the U.S. stock market saw a rebound buying spree amid expectations for easing political uncertainty. In particular, despite the U.S. 10-year Treasury yield exceeding 1.50%, the rebound buying in large technology stocks led their strength, indicating strong buying power, which is also expected to positively influence the stock market. However, since the earnings announcement period is approaching, rather than maintaining the rebound, mixed expectations and concerns are likely to cause some selling pressure.

Jaeun Kim, Researcher at NH Investment & Securities: “Despite solid Q3 earnings, stock price momentum will not be strong”

Since August, reflecting the decline in corporate profit margins due to inflation, the earnings forecast for KOSPI companies has seen weakened upward momentum but has not entered a downward trend, maintaining the forecast level. Recently, there has even been a slight upward revision, indicating a positive atmosphere. Domestic companies are expected to benefit more from the rising exchange rate than from inflationary pressures. Samsung Electronics’ Q3 earnings forecast is KRW 74 trillion in sales, KRW 16 trillion in operating profit, and KRW 12 trillion in net profit. The normalization of foundry operations, recovery in smartphone sales, and the rise in the KRW-USD exchange rate in Q3 are expected to be factors contributing to improved earnings.

Other export-driven sectors are also expected to benefit positively from the exchange rate. Exporters’ operating profit margins have shown a positive correlation with the KRW-USD exchange rate, except for 2019 when the U.S.-China trade dispute emerged. By major sectors, upward revisions in Q3 operating profit forecasts have been seen in export sectors such as steel, semiconductors, displays, and IT hardware. However, within export sectors, performance differentiation is occurring, with downward revisions in Q3 operating profit forecasts confirmed for the automobile and chemical industries.

Nevertheless, despite solid Q3 earnings, stock price momentum is expected to remain weak. Although upward revisions in Q3 earnings forecasts for export companies have occurred due to the rising exchange rate, uncertainty about next year’s earnings remains unresolved. For export companies, next year’s earnings forecasts are similar to or slightly higher than this year’s, but profit margins are expected to peak this year. Therefore, investors’ doubts about maintaining profitability remain high.

The adverse effects of the rising exchange rate are also a concern. Increased exchange rate volatility leads to greater volatility in foreign exchange-related gains and losses for domestic companies. Foreign exchange-related gains and losses refer to foreign exchange gains arising from the collection of foreign currency assets or repayment of foreign currency liabilities, and foreign exchange translation gains or losses caused by exchange rate fluctuations of monetary foreign currency assets or liabilities at the balance sheet date. Since domestic companies have a higher proportion of foreign currency liabilities than assets, exchange rate increases result in foreign exchange translation losses, which inevitably affect net profit.

Junho Byun, Researcher at Heungkuk Securities: “Inflation expansion unlikely to imply interest rate hikes”

The Federal Reserve has begun to acknowledge the market’s suspicion that inflation concerns may not be temporary, and this has been conveyed through Powell’s statements. The recent inflation concerns could lead to interest rate hikes, which is a burden. Since the Fed has expressed inflation concerns, there is now room for policy response.

However, regarding inflation responses by major countries, it is judged that they are more likely to choose energy-related policy cooperation rather than rapid tightening. Given the ongoing COVID-19 situation and the timing of announcing the tapering schedule, immediately mentioning interest rate hikes could create excessive tension in terms of tightening intensity. It is also difficult to view the current inflation concerns as mainly due to low interest rates. Although the tapering schedule is expected to be announced at the November FOMC, interest rate hikes are expected to be delayed.

Recently, the lack of response from OPEC+ to Biden’s call for increased production contributed to the stock market decline, indicating that policy cooperation may not be easy in responding to inflation. The conflicting interests among major global countries such as China, Australia, and the U.S. are also a concern. However, if current inflation concerns are not alleviated, there is a risk of stagflation, and the economy may fall back into recession without experiencing post-COVID-19 normalization. Therefore, major countries are expected to try to prevent a double-dip recession (a phenomenon where the economy briefly recovers after a recession but then falls back into recession) before economic normalization.

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