'High Interest Rate Fears and Credit Crisis' Tighten KOSPI Outlook, Downward Pressure Below 2200 Intensifies

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[Asia Economy Reporter Lee Seon-ae] The stock market has been hit by a credit crisis. Amid already frozen investor sentiment due to rising interest rates and recession concerns, the real estate project financing (PF) market has cooled down following default fears stemming from the Gangwon-do Legoland incident, compounding corporate bond instability. As a result, the KOSPI is expected to face strong downward pressure below the 2200 level. Securities firms foresee a stock price trend that will inevitably test downside support, emphasizing that calming the corporate bond market is most crucial.

On the 23rd, securities firms forecast that the KOSPI will show a neutral stock price movement between 2150 and 2250 during this week (24th?28th). Internally, the key factor is whether the short-term funds and corporate bond market instability triggered by the Legoland incident will subside. Externally, the release of China's real economy indicators, the European Central Bank (ECB) monetary policy meeting, U.S. inflation data, and earnings announcements from major companies are expected to influence the market.

Since the non-repayment incident of the Gangwon-do Legoland PF asset-backed commercial paper (ABCP) on the 28th of last month, instability in the short-term funding market has spread throughout the corporate bond market. This has particularly heightened liquidity concerns among securities firms and small-to-medium-sized and regional construction companies. As fears of financial and real estate company insolvencies intensified, the KRX Securities Index fell for three consecutive trading days, with securities and construction-related stocks plummeting simultaneously, followed by a wave of new lows in REITs (Real Estate Investment Trusts).

Accordingly, securities firms warn that the market may fluctuate around the 2150 level in the short term this week and could decline further due to bond market instability, with the worst-case scenario seeing a drop to 2000. Samsung Securities pointed out that the Legoland incident has exacerbated liquidity concerns among securities firms and small-to-medium-sized and regional construction companies, becoming a negative internal factor for the stock market, thus emphasizing the need to monitor whether psychological anxiety calms and investor sentiment recovers.

Kim Yong-gu, a researcher at Samsung Securities, said, "The fact that policymakers recognize the seriousness and have actively intervened in the market by resuming purchases of 1.6 trillion won in surplus funds from the Corporate Bond Stabilization Fund is a positive factor that could enable the situation to be resolved," adding, "We need to observe whether anxiety subsides and investor sentiment recovers thereafter."

Lee Kyung-rok, a researcher at Shin Young Securities, said, "The short-term funding market was particularly difficult due to the interest rate hike trend and concerns over real estate PF insolvency, and it has rapidly deteriorated after the Legoland incident," adding, "Stronger additional stabilization measures are needed to restore broken sentiment."

Gong Dong-rak, a researcher at Daishin Securities, said, "Relying solely on responses such as the Corporate Bond Stabilization Fund may have limitations in preventing the recent tightening in the funding market," noting, "During the COVID-19 period, in addition to the stabilization fund, the Bank of Korea operated unlimited RP purchases, loans to non-bank financial institutions, and the Special Purpose Vehicle (SPV) that purchased corporate bonds and commercial papers including low credit ratings."

The tightening stance of major countries is also expected to limit the upper bound of the KOSPI. The ECB will decide on its benchmark interest rate on the 27th. According to a Reuters survey, a giant step (a 0.75 percentage point hike in the benchmark rate at once) is also anticipated. Lim Dong-min, an economist at Kyobo Securities, explained, "The Eurozone headline consumer price index (CPI) is expected to exceed 10% year-on-year," adding, "Despite the coexistence of recession and fiscal crisis, the environment forces an acceleration of interest rate hikes." The U.S. Federal Reserve (Fed) has entered a blackout period ahead of the Federal Open Market Committee (FOMC) meeting in early November.

Ahn Young-jin, a researcher at SK Securities, said, "Recent hawkish remarks by Fed officials and surprises in the UK producer price index (PPI) have refocused market attention on tightening policies," adding, "With important events and indicators being announced, the stock market is expected to maintain a cautious stance." Daol Investment & Securities noted that although the market already recognizes the possibility of consecutive giant step hikes until year-end, hawkish Fed officials' remarks make it difficult to lower guard, suggesting the stock market may remain subdued ahead of monetary policy events.

Earnings announcements from major U.S. companies are also scheduled, expected to impact the domestic stock market. Earnings from major big tech companies such as Alphabet, Apple, Meta, and Microsoft (MS), as well as companies like Coca-Cola, McDonald's, ExxonMobil, and Chevron, will be released. For the time being, fluctuations in the U.S. stock market will largely depend on these companies' earnings. Domestic companies will also continue to announce third-quarter earnings. Hyundai Motor is scheduled for the 24th, SK Hynix and LG Energy Solution on the 26th, and Samsung Electronics and LG Electronics will announce finalized third-quarter results on the 27th and 28th, respectively.

Kim Yong-gu of Samsung Securities said, "Since the companies announcing earnings represent key stocks in each industry, it will be a good opportunity to comprehensively check future economic and consumption outlooks, pricing power, and cost management capabilities," adding, "It is important to closely observe the guidance they provide on future earnings trajectories rather than focusing solely on the third-quarter results."

Park Hee-chan, a researcher at Mirae Asset Securities, said, "Although earnings announcements are upcoming, conservative guidance for the future is expected, making it difficult to have high expectations for a market turnaround."

Meanwhile, last week, the KOSPI closed at 2213.12, up 0.57 points (0.02%) from the previous Friday's closing price. Although it once dropped to the 2170 level, it succeeded in reclaiming the 2250 level but was again held back by the credit crisis, showing a three-day consecutive decline and barely closing above the 2210 level.

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