Spring Breeze in the Stock Market: Trend Rebound vs. Technical Rebound

Improvement in Risk Asset Investment Sentiment Including KOSPI
High Possibility of Technical Rebound Due to Resolution of Extreme Concerns

On the 17th, the KOSPI and the KRW-USD exchange rate were displayed on the electronic board in the dealing room of Hana Bank in Euljiro, Seoul. The U.S. Federal Reserve raised the benchmark interest rate by 0.25 percentage points for the first time in 3 years and 3 months. Photo by Moon Honam munonam@

[Asia Economy Reporter Hwang Junho] Recently, the KOSPI has risen for three consecutive trading days, indicating an improvement in investment sentiment toward risk assets. Consequently, expectations for a trend reversal have also increased. However, the securities industry analyzes that it is reasonable to view this as a technical rebound resulting from the resolution of various uncertainties.

It is still difficult to say that concerns about inflation have ended, and in fact, the Federal Reserve, which determines U.S. monetary policy, showed a hawkish tone at the recent Federal Open Market Committee (FOMC) meeting. While extreme concerns may have been alleviated, it is considered premature to expect a sustained trend reversal.

The Fed Was Hawkish

[Image source=Yonhap News]

According to the Korea Exchange on the 20th, the KOSPI rose for three trading days starting from the 16th. Although the rate of increase decreased from 1.44% on the 16th to 1.33% and then 0.46%, the upward curve did not break.

Foreign investors, who had sold domestic stocks for seven consecutive trading days, turned to net buying for two days starting on the 16th, which was effective. The announcement of the FOMC results on the 16th removed one uncertainty. In particular, Fed Chair Jerome Powell’s statement after the FOMC ended market concerns about a recession caused by monetary tightening, increasing preference for risk assets and boosting the U.S. stock market. This also became an opportunity for foreign funds that had exited the KOSPI to return.

However, a closer look at the FOMC results shows that the Fed’s decision was not weak. First, the participants’ projections for the benchmark interest rate (dot plot) were significantly revised upward. The median forecast was for a total increase of 175 basis points by the end of this year (seven hikes of 25 basis points each), but 44% of participants (7 people) expressed opinions that rates should be raised even more. The median projections for next year and the year after also exceeded the estimated neutral rate midpoint (2.375%). Raising the benchmark rate above the median indicates an intention to curb economic expansion.

KB Securities researcher Kim Ilhyuk explained, "Among various uncertainties, the most fundamental is monetary tightening, which can have a more negative impact as a bad factor."

Even if the Russian Invasion Ends, Will Inflation Pressure Persist?

On the 14th, as international oil prices surged due to Russia's invasion of Ukraine, fuel price information was displayed at a gas station in Seoul where domestic gasoline prices are rising. Photo by Mun Honam munonam@

The FOMC attracted attention because it provided clues about how the U.S. would respond to inflationary pressures caused by Russia’s invasion of Ukraine. Despite the hawkish tone, the statement that recession concerns were not significant was more meaningful to the stock market.

However, inflationary pressures have not disappeared. Although there has been progress in negotiations between Russia and Ukraine, international oil and grain prices are likely to continue facing upward pressure even after the war. Recently, oil prices, which had exceeded $130 per barrel, fell to around $90 due to weakened escalation prospects and China’s city lockdowns amid COVID-19 spread, but have again surpassed $100, which should be noted.

Researcher Park analyzed, "Even with recession concerns, if oil prices do not fall sufficiently, it burdens the economy," adding, "With grain prices also rising, consumers have to spend more on essentials like energy and food." He continued, "According to a recent survey by Quinnipiac University, 64% of respondents said rising oil prices are a serious problem, and 45% reported significantly reducing spending due to higher oil prices," forecasting that "while the Fed’s dot plot hiking cycle has ended, the economic outlook downgrade cycle may continue."

Accordingly, "The recent stock market rally is more of a technical rebound caused by the reduced likelihood of extreme scenarios rather than a trend reversal driven by fundamental recovery," and "While corporate earnings expectations support the market, the actual environment is not favorable for earnings," he diagnosed.

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