[Good Morning Stock Market] US Stocks Rise Despite Recession Fears... Will KOSPI Also Gain Momentum?

Despite Long-Short Interest Rate Inversion, US Stock Market Closes Higher
Expectations for Russia-Ukraine Ceasefire Boost Sentiment, KOSPI Expected to Start Higher

US-Japan Monetary Policies Diverge, Yen Weakness to Continue in Q2
"Export Positive Trend Maintained, Domestic Companies Unlikely to Suffer Significant Impact"

[Image source=Yonhap News]

[Asia Economy Reporter Minji Lee] Despite the inversion of short- and long-term interest rates, the U.S. stock market closed higher. Although concerns about an economic recession are growing, the market reflected higher expectations for a ceasefire between Russia and Ukraine. Negative factors such as the weak yen and the lockdown in Shanghai, China, remain, but considering the rise in the U.S. stock market, the KOSPI on the 30th is expected to start higher and continue its upward trend.

Sangyoung Seo, Researcher at Mirae Asset Securities: “Tech stocks’ upward trend expected to boost domestic market by around 1%”

The U.S. stock market showed an upward trend as expectations for peace negotiations between Russia and Ukraine drew attention. The Nasdaq index rose 1.84%, while the S&P 500 (1.33%) and Dow (0.97%) also closed higher. The news of significant progress in the negotiations increased hopes for resolution. Risk asset preference also rose, particularly in travel, leisure, and automobile stocks.

Meanwhile, in the previous day’s U.S. financial market, aggressive monetary policy by the Federal Reserve (Fed) highlighted an inversion of short- and long-term interest rates, with the 2-year Treasury yield surpassing the 10-year yield during the session. Generally, the 2-year yield is linked to the benchmark interest rate, while the 10-year yield is tied to the 30-year mortgage rate. This situation could lead to a sharp contraction in banks’ net interest margins and a decrease in corporate lending, increasing the likelihood of economic slowdown.

Considering that recessions typically occur about six quarters after the short- and long-term rate inversion, this is not an immediate problem. However, as this situation persists, the global economic slowdown issue is expected to continue pressuring the economy. In the stock market, tech stocks rose due to falling long-term rates, while traditional value stocks declined.

Despite concerns about recession due to the inverted yield curve, the stock market’s rise, supported by easing tensions in the Ukraine situation, is positive for the domestic market. Especially considering the upward trend in tech stocks based on improved earnings expectations, the KOSPI on the 30th is also expected to show an upward trend. Foreign investors’ supply and demand are also expected to ease as the won-dollar exchange rate is anticipated to weaken and decline.

Kyoungsoo Lee, Researcher at Hana Financial Investment: “Earnings-based individual stock market expected to continue”

For the time being, the domestic stock market is expected to continue an earnings-based individual stock market. This is mainly because the foreign investor supply base within the domestic market has weakened due to the lack of global risk appetite. Also, despite strong profit forecasts in the global energy sector, earnings in China and emerging markets are expected to be sluggish. Typically, when discounts in emerging markets deepen, long-short strategies that verify fundamentals have been positive, supporting this outlook. Furthermore, from April to June, information on earnings tends to have the highest correlation with stock prices, so it is important to closely monitor changes in quarterly or annual earnings by sector and stock.

To consider earnings, it is necessary to check whether earnings have improved over three months while also considering short-term profit momentum of about one month. It is important to see whether earnings improvement is sustained rather than a one-time event. Currently, sectors with both positive annual 3-month and 1-month profit momentum include shipping, securities, trading companies, semiconductors, textiles and apparel, airlines, healthcare equipment, technology hardware, refining, machinery, and non-ferrous metals.

Jiyoung Han, Researcher at Kiwoom Securities: “Weak yen variable unlikely to significantly impact domestic stock market”

A new variable called ‘weak yen’ has appeared in the domestic stock market. The yen-dollar exchange rate reached near 125 yen, hitting the lowest level in about seven years. The yen’s weakness has been unfolding since last year but has deepened further this year.

The background of the weak yen is the differing monetary policy responses between the U.S. and Japanese central banks. The Fed is strengthening its hawkish stance, while the Bank of Japan remains accommodative and supportive. As the monetary policy divergence continues, pressure on the yen’s weakness due to the widening U.S.-Japan interest rate gap may persist. Internally, ongoing trade and current account deficits are also major factors, as the current account deficit trend strengthens yen selling and dollar buying flows.

Accordingly, concerns are rising that this will negatively affect the earnings and stock prices of domestic export companies in sectors with high export competition with Japan, such as steel, home appliances, and automobiles. After the launch of Abenomics, aggressive stimulus measures were implemented from 2013 to 2015, during which the yen-dollar exchange rate surged about 40%, marking a period of extreme yen weakness. During that time, the KOSPI was trapped in a long-term box range, while the Japanese stock market soared by more than 80%. The KOSPI’s rise was -1.7%, while the Nikkei 225 surged 83%.

However, the likelihood of a repeat of the past scenario is low. Although competing with Japanese companies in export markets is a burden, the actual impact of yen weakness on the domestic stock market was not significant during the period when Abenomics was launched. The main pressure on the domestic market then was export sluggishness due to weakening economic momentum in the U.S.

Ultimately, the direction of domestic companies’ earnings and the KOSPI stock price is determined by the situation of major domestic demand sources. The fact that domestic exports are currently maintaining a positive growth trend, rather than negative, differentiates the current situation from the past. Although manufacturing momentum in the U.S. and China is slowing, this was largely due to supply shortages. Considering reopening expectations and China’s shift to a stimulus policy, domestic companies’ import demand is expected to remain robust going forward.

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