KOSPI Hit by 'Credit Crisis'... Will It Smile Amid 50 Trillion Liquidity and US Tightening Pace Adjustment Debate?

KOSPI Direction Determined by Corporate Bond Market Stabilization and Major Countries' Tightening Policy Trends

[Image source=Yonhap News]

[Asia Economy Reporter Lee Seon-ae] The domestic stock market, frozen by global macroeconomic uncertainties such as high-intensity monetary policies and fears of high interest rates, has now been hit by a credit crisis. The uncertainty in the bond market triggered by the cooling of the real estate project financing (PF) market due to the Gangwon-do ‘Legoland default’ incident is raising concerns that the KOSPI could fall below the 2200 level. This week, the stock market is expected to inevitably show a downward price movement testing support levels, with the direction of the KOSPI likely to be determined by whether the corporate bond market calms down and the course of major countries’ tightening disputes.

On the 24th, the KOSPI opened at 2248.26, up 35.14 points (1.59%). This rise is interpreted as a reaction to the news that the government and financial authorities decided to activate a liquidity supply program exceeding 50 trillion won. The government’s liquidity supply program includes a 20 trillion won Bond Market Stabilization Fund (Bond Stabilization Fund), a 16 trillion won corporate bond and commercial paper (CP) purchase program, 3 trillion won support for securities firms facing liquidity shortages, and 10 trillion won in guarantee support for businesses from the Housing and Urban Guarantee Corporation (HUG) and Korea Housing Finance Corporation. The rebound in the New York stock market, influenced by expectations that the U.S. Federal Reserve (Fed) will slow the pace of interest rate hikes, also helped restore investor sentiment. Seosangyoung, a researcher at Mirae Asset Securities, interpreted, “The U.S. stock market’s rise of over 2% due to increased expectations of the Fed slowing its rate hikes positively impacted the Korean stock market.”

The securities industry forecasts that the KOSPI will show a neutral price range between 2150 and 2250 during this week (24th?28th). Internally, the key issue is whether short-term funds and corporate bond market instability triggered by the Legoland incident will subside. Externally, factors such as China’s real economy indicators, the European Central Bank (ECB) monetary policy meeting, U.S. inflation data, and major corporate earnings announcements are expected to influence the market. Kim Yong-gu, a researcher at Samsung Securities, predicted, “The KOSPI will show price movements testing support below the 2200 level. Externally, it will be divided between major economic data releases such as China’s real economy and U.S. inflation indicators in September, and internally, it will depend on whether short-term fund market instability calms down following the start of the Bond Stabilization Fund’s purchases.”

Since the non-repayment incident of the Gangwon-do Legoland PF asset-backed commercial paper (ABCP) on the 28th of last month, short-term fund market instability has spread to the overall corporate bond market, affecting investor sentiment. In particular, concerns about liquidity among securities firms and small-to-medium-sized and regional construction companies have been triggered. Samsung Securities pointed out that the Legoland incident exacerbated liquidity concerns within securities firms and small-to-medium-sized and regional construction companies, becoming a negative factor inside the stock market, so it is necessary to closely monitor whether psychological anxiety subsides and investor sentiment recovers. Researcher Kim said, “The fact that policy authorities recognized the seriousness and began market intervention in earnest, such as resuming purchases with the Bond Stabilization Fund’s surplus funds, is a positive factor that could enable the situation to be resolved. We need to observe whether anxiety subsides and investor sentiment recovers thereafter.”

Shinhan Investment Corp. viewed the short-term fund market problem leading to credit spread widening as negative for the stock market. The KOSPI has recorded the lowest price-to-book ratio (PBR) ever during past credit risk periods, such as the 2003 credit card bond crisis, the 2008 global financial crisis, and the 2020 COVID-19 outbreak. Shinhan Investment researcher Roh Nok-gil said, “Credit risk will continue until the end of the year due to interest rate hikes and short-term fund market issues. However, the previous three cases show that when Korean stock market investors turn their attention to capital costs, valuations can change rapidly. The key issue is whether there is a manufacturing sector shift, but considering the central bank’s role after the financial crisis, it is not yet a stage to worry about a manufacturing shift.”

The tightening stance of major countries is expected to limit the upside of the KOSPI. The ECB will decide its benchmark interest rate on the 27th. According to a Reuters survey, a giant step (a 0.75 percentage point increase 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) inflation rate is expected to exceed 10% year-on-year. Although recession and fiscal crises coexist, the environment forces an acceleration of 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. SK Securities researcher Ahn Young-jin said, “Recent hawkish remarks by Fed officials and surprises in the UK producer price index (PPI) have refocused market attention on tightening policies. Since important events and indicators will be announced, the stock market is expected to remain cautious and observe.”

However, the Wall Street Journal (WSJ) reported the possibility of the Fed slowing the pace of monetary policy, which is seen as a positive factor for stock market gains. The WSJ predicted that the Fed will raise rates by 0.75 percentage points at the November meeting and discuss whether and how to raise rates by a smaller amount in December. Regarding this, researcher Roh noted, “A stock market rebound is possible due to expectations of a slowdown in the pace of rate hikes.”

Earnings announcements from major U.S. companies are also scheduled, expected to influence 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 are expected to be driven by the earnings of major companies. Domestic companies’ third-quarter earnings announcements will continue. SK Hynix and LG Energy Solution will announce on the 26th, while Samsung Electronics and LG Electronics will release their finalized third-quarter results on the 27th and 28th, respectively. Researcher Kim 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. Rather than focusing solely on the third-quarter results, it is important to closely examine the guidance they provide on future earnings paths.” He added, “At the current index and valuation levels, it is more important to hold rather than join panic selling, and to respond with strategic bottom-fishing rather than aimless observation.”

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