[Good Morning Stock Market] 'Return of the Hawks' and 'US-China Conflict'

The Federal Reserve System, the monetary policy decision-making body located in Washington, USA.

[Asia Economy Reporter Hwang Junho] A new dark cloud is looming over South Korea's stock market ahead of its opening on the 3rd. Amid remarks from Federal Reserve (Fed) officials suggesting the need for another giant step (a 0.75% increase in the benchmark interest rate), combined with projections that U.S.-China tensions could reignite following U.S. House Speaker Nancy Pelosi's visit to Taiwan, a preference for safe-haven assets is expected to rise.

On the 2nd (local time), the U.S. stock market closed mixed and then declined (Dow -1.23%, Nasdaq -0.16%, S&P 500 -0.67%, Russell 2000 -0.05%) amid various forecasts related to Pelosi's visit.

As forecasts emerged that the dispute between the two countries would not escalate to military conflict, the market showed signs of stabilization. The U.S. government hinted that it does not want the issue to escalate by reaffirming the 'One China' policy, and although China announced live-fire drills encircling Taiwan from the 4th to the 7th, tensions heightened, but the expectation that the economic impact would not expand helped stabilize the market.

However, downward pressure increased due to a series of hawkish remarks from Fed officials who determine U.S. monetary policy. Before the market opened, Mary Daly, president of the Federal Reserve Bank of San Francisco with a moderate stance, stated that she could not understand the market's expectation of a dovish Fed and suggested that an aggressive rate hike policy would continue. During the session, Loretta Mester, president of the Cleveland Fed with a hawkish stance, forecasted that this year's growth rate would be below trend but said more work (rate hikes) was needed as there was no evidence that inflation had begun to stabilize. Following this, Charles Evans, president of the Chicago Fed with a dovish inclination, said a 50bp hike in September would be reasonable, but if inflation does not ease, a 75bp hike would also be a good option.

Following the aggressive remarks from Fed officials, U.S. Treasury yields rose and the dollar strengthened. Demand to prepare for further large-scale rate hikes and an increased preference for safe-haven assets occurred simultaneously. The 10-year U.S. Treasury yield rose 17.61 basis points from the previous day to 2.748%. The dollar index increased by 0.81% to 106.303.

Employment data, which had been preventing the U.S. from entering a recession, also showed signs of gradual slowdown, negatively impacting the stock market. U.S. job openings in June recorded 10.698 million, falling short of the previous month's announcement (11.303 million) and expectations (11 million). The employment rate slowed from 6.9% announced last month to 6.6%, with retail employment notably declining from 7.0% to 5.1%.

[Image source=Yonhap News]

Seo Sang-young, a researcher at Mirae Asset Securities, said, "The increased volatility in the U.S. stock market due to Nancy Pelosi's visit to Taiwan and aggressive remarks from Fed officials will also be a burden on South Korea's stock market," adding, "Unlike the previous day, the sharp rise in U.S. Treasury yields and the strengthening dollar could burden foreign capital flows, negatively affecting the stock market."

Han Ji-young, a researcher at Kiwoom Securities, analyzed, "If the July U.S. consumer price index (market expectation 8.8%, June 9.1%) announced on the 10th confirms a peak-out, a 50bp hike is likely at the September Federal Open Market Committee (FOMC) meeting, which will decide on further rate hikes, and sensitivity to upcoming Fed officials' remarks is expected to decrease."

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