[Good Morning Stock Market] The Exchange Rate Is the Problem... KOSPI Expected to Start Lower

Won-Dollar Exchange Rate Movements as a Variable
Strong US Employment... Increased Likelihood of Continued High-Intensity Tightening
US August Industrial Production Weakness... Rising Recession Concerns
"Increased Volatility in Raw Materials and Software Sectors"
Index Downside Rigidity Expected to Persist

[Image source=Yonhap News]

[Asia Economy Reporter Hwang Yoon-joo] On the 16th, the domestic stock market is expected to start lower due to concerns over the won-dollar exchange rate movements and economic recession. In particular, the extent of the decline is expected to vary depending on the exchange rate trend.

On the 15th (U.S. Eastern Time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 39,961.82, down 173.27 points (0.56%) from the previous session. The S&P 500, focused on large-cap stocks, fell 44.66 points (1.13%) to 3,901.35, and the tech-heavy Nasdaq dropped 167.32 points (1.43%) to 11,552.36.

The New York stock market started higher following the release of robust retail sales data before the opening but then turned downward. The Dow fell to its lowest level since July 14 (closing basis). The three major indices are also likely to show a decline of more than 3% for the week ending on the 16th.

Seo Sang-young, Head of Media Content at Mirae Asset Securities: "KOSPI to start down about 0.7%"

The Korean stock market is expected to start down about 0.7% amid sector differentiation and then fluctuate depending on the won-dollar exchange rate trend.

Considering that the U.S. stock market overnight showed strength centered on stocks with positive news, differentiation is underway, so the KOSPI market may see increased volatility centered on commodities and software sectors.

The variable is the exchange rate. Expansion of volatility in the foreign exchange market could negatively impact the domestic stock market. This is because foreign investor demand may shrink. On the previous day in the Seoul foreign exchange market, the won-dollar exchange rate approached 1,400 won at one point. The government intervened verbally, which caused some retracement.

However, as the dollar strengthened further in the Asian market, foreign selling increased in the latter part of the session, leading to a downturn and an expanded decline, with both KOSPI and KOSDAQ closing lower.

Also, the fact that U.S. economic indicators show solid employment and consumption is a burden. The high-intensity rate hike stance is likely to continue. The number of initial jobless claims in the U.S. was recorded at 213,000, which is lower than the expected figure (228,000) and the previously announced number (218,000).

U.S. retail sales in August increased by 0.3% month-over-month, improving from last month's report (-0.4%), but excluding automobiles, the figure decreased by 0.3% month-over-month. Excluding automobiles and gasoline, the figure rose 0.3%, the same as last month’s report. However, it fell short of the expected increase of 0.6% month-over-month.

U.S. industrial production in August decreased by 0.2% month-over-month, underperforming last month's report (0.5% increase month-over-month). Factory utilization rate also slowed from 80.2% to 80.0%.

[Image source=Yonhap News]

Han Ji-young, Researcher at Kiwoom Securities: "High exchange rate and economic indicators exert bearish pressure... Downside rigidity maintained"

On the 16th, the Korean stock market is expected to face bearish pressure. Additional adjustments in the U.S. stock market, Chinese retail sales, industrial production, and other real economy indicators are likely to increase caution. Also, the high exchange rate nearing the 1,400 won level is expected to pressure the stock market.

On the previous day, the Korean stock market attempted a rebound during the session but ultimately closed lower due to the won-dollar exchange rate entering the 1,390 won range and individual negative factors related to secondary battery stocks.

However, before the Consumer Price Index (CPI) announcement, the domestic stock market showed weaker rebound momentum compared to other markets, and considering not only the won but also the exchange rate level, the valuation attractiveness in dollar terms is high. Taking this into account, the downside rigidity of the index is expected to be maintained.

Also, from the export-import price index released early on the 16th Korean time, it can be seen that the overall import price increase has slowed, especially for intermediate goods (June year-over-year 11.1% increase → July 5.7% → August 3.8%) and overall import prices (19.9% → 12.6% → 10.7%). Therefore, stocks related to export manufacturing sectors such as electronics are expected to perform relatively well, supported by easing concerns over margin deterioration.

Meanwhile, the U.S. stock market continues to experience aftershocks from the August CPI shock. Anxiety about the September Federal Open Market Committee (FOMC) meeting is also increasing. According to CME Fed Watch, the probability of a 100 basis point rate hike in September has dropped from the 30% range to the 20% range. The possibility of a 75 basis point hike (80%) is again becoming the most likely scenario, which is a silver lining.

However, with the expansion of quantitative tightening (from $47.5 billion to $95 billion), which has an effect equivalent to a 25 basis point rate hike, even if the Fed limits the hike to 75 basis points, concerns are rising about whether the economy can withstand it.

As can be seen from the number of initial jobless claims, the strength of the employment market justifies the Fed’s high-intensity tightening. August retail sales (0.3% increase month-over-month, expected 0.2%) were also reported positively, but consumers’ real purchasing power, adjusted for inflation, has not improved.

August industrial production (0.2% decrease month-over-month, expected 0.1%) was reported weakly, and real economy indicators excluding employment are slowing. The Atlanta Fed’s Q3 growth forecast, which once recorded in the 2% range, has been lowered to the 0.5% range as of the 15th.

From the Fed’s perspective ahead of policy decisions, there is increased concern whether to shock the market with an unexpected large rate hike (over 100 basis points) to sharply reduce inflation expectations or to consider the economic situation and opt for a moderate rate hike (75 basis points or less).

Ultimately, until the next week’s FOMC, a game of nerves among market participants regarding the Fed’s policy decision is expected to continue. It is judged that it is appropriate to respond with a wait-and-see approach rather than reacting to specific stock price movements until the FOMC results are announced.

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