KOSPI Falls 2% Due to Foreign and Institutional Selling... Is the US Summer Rally Over?

Expert: "Will face downward pressure but not as significant as the US stock market"

[Photo by AFP Yonhap News]

[Asia Economy Reporters Byunghee Park, Jeongyun Lee] The domestic stock market could not escape the shock caused by Jerome Powell, Chair of the U.S. Federal Reserve (Fed), delivering strongly hawkish remarks. With foreign investors and institutions continuing to sell more than they buy, the market capitalization of the stock market instantly dropped by more than 2%. As of 10 a.m. on the 29th, the KOSPI fell 56.23 points (2.27%) from the previous session to 2424.80, and the KOSDAQ dropped 20.77 points (2.59%) to 781.68. In the KOSPI market, foreigners and institutions sold a net 56.9 billion KRW and 183.4 billion KRW respectively, fueling the index decline. Only individual investors defended the index by net buying 232.3 billion KRW.

◆ Top market cap stocks fall together but shock is limited = The large-scale selling by major players caused all the top market capitalization stocks, which have a significant influence on the index, to show weakness. Kakao fell the most, dropping 4.21%. Following were Naver (NAVER) (-3.72%), LG Chem (-3.57%), Hyundai Motor (-3.10%), LG Energy Solution (-3.01%), SK Hynix (-2.94%), Samsung SDI (-2.73%), Samsung Electronics (-2.17%), Samsung Biologics (-2.01%), and Kia (-1.77%).

The leading stocks of the KOSDAQ, which retreated quickly from the 800 level to the 780 level, also could not avoid weakness. Alteogen (-4.75%), Celltrion Pharm (-3.95%), Pearl Abyss (-3.94%), Studio Dragon (-3.78%), Celltrion Healthcare (-3.22%), L&F (-2.99%), EcoPro BM (-2.98%), Kakao Games (-2.87%), and EcoPro (-1.29%) all declined. Only HLB (0.11%) showed gains alone.

The driving force behind the market decline was the words of Jerome Powell, Fed Chair, across the Pacific. Powell said, "We need to maintain a restrictive stance for the time being," and "Unfortunately, reducing inflation comes with costs." This single statement caused all three major New York indices to plunge more than 3%.

The domestic stock market was directly affected by this. However, experts expect the shock to be less severe than in the U.S. Ji-young Han, a researcher at Kiwoom Securities, explained, "Although the domestic stock market will face downward pressure reflecting the Jackson Hole shock early this week, since the level of optimism was relatively lower than that of the U.S. market, the downside rigidity is expected to be maintained."

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◆ U.S. futures sell-off largest in 26 months... pessimism prevails = The New York stock market is expected to experience increased volatility for some time. The Wall Street Journal (WSJ) reported on the 28th (local time) that "As investors expecting a decline in the New York stock market increase, net short positions in S&P 500 index futures have grown to the largest scale in two years," warning analysts that the summer rally is over and the market will return to the highly volatile conditions seen in the first half of the year.

According to the U.S. Commodity Futures Trading Commission (CFTC), the volume of short positions in S&P 500 index futures has steadily increased over the past two months, exceeding 260,000 contracts as of the 23rd. This is the largest net short position since June 2020.

Despite gains over the past two months, the S&P 500 index still records a 15% decline year-to-date. Mark Hacket, head of investment research at Nationwide Investment, said, "There is a lot of pessimism," adding, "We still maintain a selling stance when stock prices rise."

The Jackson Hole meeting, once seen as a key factor in determining market direction, is now more likely to act as a negative factor. Powell delivered stronger hawkish remarks than expected. He emphasized, "We need to continue raising the benchmark interest rate and keep it at a high level until we are confident that inflation is under control."

With the U.S. consumer price inflation rate slowing from 9.1% in June to 8.5% in July and recent declines in international oil prices raising hopes for a peak in inflation, Powell's hawkish comments delivered a significant shock to the market.

The Chicago Mercantile Exchange's FedWatch tool, which predicts the Fed's rate hike magnitude through federal funds futures trading, now sees a higher probability that the Fed will decide on a giant step (0.75 percentage point rate hike) rather than a big step (0.5 percentage point hike) in September following the Jackson Hole meeting. The probability of a giant step has risen from 47% on the 19th to 64% currently.

◆ Corporate earnings expectations decline but concerns over monetary tightening persist = The decline in corporate earnings expectations also burdens the stock market. In a recent FactSet Research survey, analysts forecast an 8% increase in corporate earnings this year, down from the 10% growth expected in early July.

According to market research firm Refinitiv, U.S. equity funds saw a total outflow of $44.1 billion in June and July. Although inflows resumed in early August, net outflows of $1.2 billion were recorded again during the week ending on the 24th.

This week, the U.S. August employment report (September 2) and the August Eurozone consumer price index release are expected to determine the market direction.

In a Bloomberg survey, analysts expect the Eurozone's August consumer price inflation to rise to 8.0%, up from 7.9% in July. The U.S. August unemployment rate is expected to remain steady at 3.5%, with nonfarm payrolls increasing by 300,000. With European inflation rising and U.S. employment maintaining stability, concerns over monetary policy tightening are likely to intensify further.

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