[Good Morning Stock Market] Fed Hawkish Remarks and Rising COVID-19 Cases in China Weigh on KOSPI, Expected to Start Lower

[Asia Economy Reporter Hwang Yoon-joo] On the 29th, the Korean stock market is expected to start lower. Hawkish remarks from U.S. Federal Reserve (Fed) officials are likely to impact investor sentiment. Concerns over economic contraction due to the spread of COVID-19 in China also pose a burden. However, there is potential for a rebound buying trend centered on large-cap stocks.

On the previous day (local time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 33,849.46, down 497.57 points (1.45%) from the previous session. The large-cap focused S&P 500 index ended at 3,963.94, down 62.18 points (1.54%), and the tech-heavy Nasdaq index closed at 11,049.50, down 176.86 points (1.58%).

Sangyoung Seo, Head of Mirae Asset Securities: "Starting lower... Rebound buying expected mainly in large-cap stocks"

[Image source=Yonhap News]

The Korean stock market was sluggish the previous day due to the weekend's new COVID-19 spread in China. Particularly, as protests against intensified COVID lockdowns over the weekend expanded, overall investor sentiment weakened. This was a burden on the Korean stock market, which is highly dependent on exports, as it could exacerbate concerns about China's economic slowdown. Additionally, the won-dollar exchange rate surged by 16.5 won, intensifying won weakness, which negatively affected foreign investor flows, adding to the burden.

Amid this, the KOSPI is expected to start down about 0.5% on the 29th. The U.S. stock market's decline, highlighting concerns over economic slowdown due to the spread of COVID-19 in China, is expected to negatively impact the Korean market. In particular, Apple, which is likely to see reduced sales due to Foxconn factory concerns continuing from last Friday into Monday, fell 2.63%, and the Philadelphia Semiconductor Index also dropped 2.63%, adding to the burden.

Hawkish remarks from the Fed are also a concern. James Bullard, President of the St. Louis Fed, argued that high interest rates must be maintained in 2024 and warned that the market is underestimating the Fed's aggressive stance.

However, the protests related to COVID in China are viewed positively as they may accelerate policy changes by the Chinese government. This is because the former editor-in-chief of the Global Times, which reflects the Chinese government's voice, mentioned that China will emerge from the shadow of COVID faster than expected.

Therefore, the strong rebound buying of Chinese companies in the U.S. stock market is expected to positively influence the Chinese stock market today, raising expectations for improved investor sentiment. Considering this, the Korean stock market is expected to start lower but see rebound buying mainly in large-cap stocks.

Ji-young Han, Kiwoom Securities Researcher: "Weak trend expected... Foreign selling anticipated"

Today, the domestic stock market is expected to show a limited weak trend. Hawkish remarks from prominent Fed officials and the U.S. stock market correction, including Apple (-2.6%), are likely to trigger foreign selling. The protests in China have also been a factor putting downward pressure on the overall market, especially on Apple-related IT chain stocks and consumer-related stocks, and are expected to remain central today. However, since much of this was already reflected the previous day, the impact is expected to be less severe than before.

The market is currently strongly anticipating a 50 basis point rate hike at the December FOMC. Some market participants appear to be factoring in that the final rate level will not be as high as expected, considering supply chain improvements, declining inflation, and an impending economic recession, and are beginning to price in Fed rate cuts by the end of next year.

However, remarks from key Fed officials on the 28th blocked such expectations and hopes. James Bullard, a leading hawk and President of the St. Louis Fed, pointed out that the market is underestimating the risk of Fed tightening and argued that the final rate will be above 5% and must remain at that level through 2024.

The New York Fed President also evaluated that tightening policies are effective but maintained a hawkish stance by mentioning that rate cuts might be possible in 2024. Similar tones may be set in remarks from Fed officials, including Chair Powell (on the 30th local time), during the remainder of this week. Nevertheless, it is judged that the recent market correction is more of a timing adjustment than a price adjustment.

Meanwhile, regarding zero-COVID, which has been a continuous burden on the Chinese economy, blank sheet protests (anti-zero-COVID protests) are occurring in major cities such as Beijing and Shanghai, adding to market concerns. Dissatisfaction with excessive quarantine measures amid the COVID spread is intensifying labor escapes from Foxconn's Zhengzhou factory.

As a result, there are forecasts that production of Apple's iPhone 14 could be disrupted by 6 million units. If the blank sheet protests prolong and intensify, there is a possibility of "worsening China-origin supply shortages → global inflation resurgence → strengthened Fed tightening." However, considering that Chinese state media have mentioned the possibility of further easing measures after these protests, the impact of the Chinese protests on the stock market is expected to be limited.

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