[Good Morning Stock Market] Growing Concerns Over 'King Dollar' in the Market... Inflation Uncertainty Eases

Low Probability of 100bp Increase at US FOMC
Inflation Concerns Ease Due to Falling Commodity Prices

Euro's Sharp Decline Drives Dollar Strength
Dollar Strength Must Ease for Continued Foreign Net Buying

[Image source=Yonhap News]

[Asia Economy Reporter Minji Lee] Despite the June U.S. Consumer Price Index (CPI) surprise, the index did not experience a sharp drop like it did in early last month, leading to analyses suggesting that concerns about a downside risk can be eased. Although the dollar hitting a 20-year high is a burden suppressing the domestic stock market, some opinions suggest that if foreign capital inflow intensifies as foreign exchange market volatility decreases due to factors such as European interest rate hikes, a rebound in the index can be expected.

Seojeonghoon, Researcher at Samsang Securities: “Inflation uncertainty is easing... downside concerns should be lowered”

Considering that inflation uncertainty is easing compared to before, it is analyzed that there is no need to overestimate additional downside risks.

Prices of major raw materials, including international oil prices, have recently been declining. The U.S. 2-year Treasury expected inflation, which reflects short-term inflation well, approached 5% in March but has now fallen to 2.9%. Considering the Fed's target range is around 2.4%, market-embedded tightening concerns are gradually easing. Recently, the global supply chain disruption index compiled by the New York Fed is at its lowest level since April last year.

Regarding the magnitude of interest rate hikes, the two consecutive months of U.S. CPI surprises raised the possibility of a 100bp rate hike to about 70%, but it has now dropped to 30%. This is thanks to key hawkish figures at the Federal Reserve (Fed) drawing a line by suggesting that a 75bp hike seems appropriate. Although the tightening intensity within the year has increased, the timing for rate cuts is gradually moving forward.

The fact that the dollar index is hitting a 20-year high could hold back the stock market. Due to the possibility of a global recession and the simultaneous weakness of the yen and euro, the dollar's strength appears to be intensifying. For the dollar to ease, it is necessary to resolve Europe's energy supply concerns and for the Fed to slow the pace of interest rate hikes.

However, since inflation uncertainty is decreasing, it is expected that there is no need to overestimate downside risks to stock prices. As the earnings season approaches, it is a time to exercise patience with a strategy of focusing on sectors where earnings forecasts are being revised upward again.

Lee Kyungmin, Researcher at Daishin Securities: “If the dollar strength is resolved, foreign net buying will continue”

Despite the shock of the U.S. June CPI, the domestic stock market is maintaining a stable trend unlike before. Even though the won-dollar exchange rate surpassed 1,326 won last weekend, marking the highest level in 13 years and 2 months, foreigners have been net buyers for two consecutive weeks.

Foreigners' brief return to the KOSPI is attributed to the won maintaining relative strength against the dollar. The recent high-level trend of the won-dollar exchange rate is largely influenced by the sharp weakness of the euro and the level-up of the dollar index. This is due to Russia's gas supply restrictions and weak European economic indicators. In fact, looking at the trends of the dollar index and the won-dollar exchange rate, it is judged that the won-dollar exchange rate is maintaining a relatively stable flow compared to the speed of the dollar's strength. The won is showing relative strength against the dollar.

The stabilization of downward revisions in earnings forecasts is also analyzed to have encouraged foreign buying. Over the past three weeks, operating profit forecasts for the second half of the year, this year, and next year were sharply revised downward, with an average change rate of 1.6%. However, after Samsung Electronics and LG Electronics announced their earnings guidance, the average volatility of earnings forecasts last week stabilized to 0.44%, and the Q2 earnings forecast was revised upward by 0.19%. Although it is difficult to reverse the market sentiment, it is analyzed to have increased downside rigidity.

For foreign net buying to continue, oil price stability and an interest rate hike decision at the ECB monetary policy meeting on the 21st are necessary. A 25bp base rate hike is expected, but the possibility of a big step (50bp hike) is also being raised. Additionally, whether the Eurozone's June CPI will exceed market expectations (8.6%) is a key factor. If favorable economic indicators are announced and the rate hike occurs at the expected level, foreign exchange market volatility is expected to enter a calming phase, and a technical rebound attempt in the KOSPI is anticipated.

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