[Good Morning Stock Market] Concerns Over US Interest Rate Hike Surge... Continued Uncertainty from Japan

Tightening Vigilance Strengthened
January FOMC Upper Benchmark Rate Expected at 5.25%
Continued Yen Weakness to Increase Volatility in Asian Markets

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Minji Lee] As concerns over the Federal Reserve's (Fed) tightening intensified, the Dow Jones Industrial Average fell by 0.3%, while the Nasdaq (-0.61%) and S&P 500 (-0.8%) also declined. Although the U.S. leading economic index was reported to be weak, Treasury yields rose due to Fed officials continuing aggressive monetary policy remarks. Domestic stock markets are expected to show weakness due to interest rate hikes and the Japanese yen's depreciation.

Ji-Young Han, Kiwoom Securities Analyst: “Expecting a weak trend due to Fed tightening concerns and Japanese issues”

Concerns over Fed tightening continue to pressure global stock markets. Market participants already anticipate the upper bound of the policy rate reaching 5.25% at the January FOMC next year. Consequently, the U.S. 10-year futures yield has surpassed 4.2%, with the rapid rise in interest rates negatively impacting stock valuations and investor sentiment. Although market worries have been stirred by UK-originated instability due to large-scale tax cuts, financial instability appears to have peaked following Prime Minister Liz Truss's resignation.

The problematic factor is Japan. The widening policy rate differential with the U.S. and the maintenance of a monetary easing stance amid relatively low inflation have caused the yen to sharply depreciate against the dollar. The increased volatility in Asian markets the previous day was also influenced by uncertainty surrounding whether the dollar-yen exchange rate would break the psychologically significant 150 yen level.

The Bank of Japan (BOJ) has intervened directly in the foreign exchange market and implemented yield curve control (YCC) measures to stabilize the situation, but market sensitivity toward the yen is expected to remain high. Since movements in the yen can cause price fluctuations not only in the foreign exchange market, such as the won-dollar exchange rate, but also in the stock market, it is appropriate to continue monitoring yen movements and managing risks for the time being.

Considering this, the domestic stock market is expected to show a weak trend due to rising market interest rates and Japanese issues. The sharp drop in Tesla's stock price and rising U.S. interest rates are expected to constrain the improvement of domestic growth stocks. By individual stocks, semiconductor companies such as Lam Research (7%) and Nvidia (1.2%) showed favorable trends due to recognition of a stock price bottom and improved earnings outlook, suggesting that semiconductor stocks will continue to perform well.

Bowon Choi, Korea Investment & Securities Analyst: “The yen's depreciation trend will continue for the time being”

The yen-dollar exchange rate has reached 150 yen, the first time since 1990. The yen's value, which hovered around 144-146 yen at the end of September and early October, sharply declined for two main reasons: the widening domestic-foreign interest rate differential due to rising U.S. Treasury yields and the successive large-scale easing policy support by Prime Minister Kishida and Governor Kuroda. The release of CPI data from the UK, Eurozone, and Canada, along with Russia's declaration of martial law, also reinforced the dollar's strength, increasing upward pressure on the yen-dollar exchange rate.

The yen's value is expected to continue facing downward pressure due to the maintenance of a monetary easing stance and the dollar's strength. Exchange rate volatility is likely to persist ahead of Japan's monetary policy meeting at the end of October and the U.S. FOMC meeting in early November. The intensity of the economic recession in Q4 this year and Q1 next year is predicted to further increase yen-dollar exchange rate volatility. If the pace of U.S. rate hikes slows after Q1, the downward pressure on the yen is expected to gradually ease.

Meanwhile, as the yen depreciates, the revenue growth potential of Nikkei 225 companies is expected to improve. Earnings forecasts are improving ahead of the earnings season, and valuation burdens have eased due to adjustments since mid-September. Considering policy momentum, retail companies strong in the domestic market are expected to show an upward trend.

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