Securities Industry Awaiting Big Step in 'Night Before the Storm'

This Week's FOMC Decision in Focus
Turning Fear into an Opportunity to Increase Weight
Hedging Positions Needed, Including Inverse ETFs

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Junho Hwang] As central banks around the world, including the U.S. Federal Open Market Committee (FOMC), hold monetary policy decision meetings this week, caution in the securities market has deepened. The securities industry advises that it is time to hedge against the threat of tightening and to pay close attention to stocks that are solid in fundamentals such as earnings and supply-demand.

The U.S. stock market hit its lowest point of the year last month due to fears of tightening. Last month, the Nasdaq fell 13.3%, recording the worst monthly return since the financial crisis (October 2008). The S&P 500 also posted a monthly return of -8.8%, marking the largest drop since March 2020 (the COVID-19 pandemic). It is analyzed that fear is growing across the market. The Fear & Greed Index by CNN, which reflects investor sentiment in the U.S. stock market, recorded 28 as of the 28th of last month (local time), indicating a "fear" stage. On the same day, the New York Stock Exchange's Volatility Index (VIX) also recorded 33.40, approaching this year's high of 36.45.

In addition to the prolonged lockdown policy in China, increased inflationary pressures, and concerns about supply chains due to the Russia-Ukraine war, fear has intensified ahead of the FOMC meeting on the 3rd and 4th, as Federal Reserve officials have voiced the need for a "giant step," i.e., raising the benchmark interest rate by 75 basis points (0.75%), which is pressuring investor sentiment.

On the 27th, when the KOSPI and KOSDAQ indices plunged by over 2%, dealers were working in the dealing room of Hana Bank in Euljiro, Seoul. The U.S. stock market sharply declined due to concerns over a slowdown in the economic recession and earnings uncertainties of big tech companies, which appears to have caused a chain reaction. Photo by Moon Honam munonam@

On the 2nd, the KOSPI and KOSDAQ also started down by 0.96% and 1.18%, respectively, unable to escape this influence. Meanwhile, the won-dollar exchange rate surpassed 1,260 won ahead of the rate hike, opening at 1,264.0 won.

In the Korean securities market, a 50 basis point rate hike and the start of quantitative tightening (QT) are considered possible outcomes of this FOMC. However, the market direction is expected to vary depending on the statements of Fed officials.

Jinwook Heo, a researcher at Samsung Securities, said, "At least two to three FOMC participants have expressed skepticism about a 75 basis point hike, so a 75 basis point increase this month seems unlikely. However, the possibility of a 75 basis point hike next month, depending on the nuance change in Fed Chair Jerome Powell's press conference after the FOMC, will be a key indicator of monetary policy uncertainty." Kyungmin Lee, a researcher at Daishin Securities, said, "The KOSPI may fall below the 2,600 level early this week, but the sharp adjustment phase can be seen not as the start of another shock wave but as a turning point emerging from extreme fear," adding, "It is necessary to use fear sentiment as an opportunity to increase weight."

The securities industry recommended stocks with strong fundamentals. Jaesung Yoon, a researcher at Hana Financial Investment, advised, "In the short term, a strategy to seek profits while hedging market volatility is necessary. If you cannot increase the proportion of safe assets, positions such as inverse ETFs are needed." Euntaek Lee, a researcher at KB Securities, suggested, "When the direction is unclear, a short-term strategy that works is to follow price and supply-demand. A rotation strategy is needed where you buy when the stock is neglected and sell when the supply-demand is drying up with high returns," adding, "It is necessary to focus on stocks with stable cash flow and high immediate earnings potential." The sectors intersecting earnings and supply-demand include automobiles, cosmetics, IT components, healthcare, and batteries.

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