[MarketING] Easing Financial Anxiety... Stabilizing Investment Sentiment

KOSPI Starts Higher
Market Reassured by Efforts to Ease Financial Instability

[Image source=Yonhap News]

As concerns over financial instability that had been shaking the stock market ease, the KOSPI opened higher. Financial instability is calming down as major U.S. banks have agreed to provide rescue support and the European Central Bank (ECB) has indicated the possibility of liquidity support. With investment sentiment, which had been subdued due to financial instability, expected to gradually recover, market attention is likely to focus on the upcoming March U.S. Federal Open Market Committee (FOMC) meeting next week.

KOSPI Opens Higher Amid Easing Financial Instability

As of 10:30 a.m. on the 17th, the KOSPI was trading at 2,387.99, up 10.08 points (0.42%) from the previous day. The KOSDAQ rose 10.46 points (1.34%) to 792.44. The KOSPI initially surged more than 1% to reclaim the 2,400 level but the gains gradually narrowed.

This strength is interpreted as a result of the U.S. stock market's significant rise following the easing of financial instability concerns. On the 16th (local time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed up 1.17%, the S&P 500 rose 1.76%, and the Nasdaq increased 2.48%. The U.S. stock market, which showed weakness early in the session, rebounded after major U.S. banks agreed to inject $30 billion (approximately 40 trillion KRW) into First Republic Bank, which had raised liquidity crisis concerns.

Sangyoung Seo, a researcher at Mirae Asset Securities, explained, "The U.S. stock market's strength following the support news from major banks is positive for the Korean stock market. Especially, the fact that there has not been a large-scale withdrawal and stability is being restored, along with efforts to improve sentiment such as U.S. Treasury Secretary Janet Yellen's announcement that the U.S. financial system is stable, helped expand gains in the latter part of the session, which is also positive."

JP Morgan Chase, Citi, Bank of America (BoA), and Wells Fargo each agreed to invest $5 billion in First Republic, which had been labeled as the second Silicon Valley Bank (SVB). Goldman Sachs and Morgan Stanley each committed $2.5 billion, while U.S. Bancorp, Truist Financial, PNC Financial Services Group, State Street, and BNY Mellon each pledged $1 billion. First Republic initially plunged 35% due to liquidity concerns but reversed to a sharp rise following the support announcements from major banks. Jiyoung Han, a researcher at Kiwoom Securities, analyzed, "This support is substantial relative to First Republic's asset size, and the rapid liquidity supply and white knight role of major banks seem intended to convey confidence to the market that a 2008-like crisis will not be repeated. This positively influenced the market, as evidenced by the stock market rebound and the sharp rise in bond yields."

The swift crisis response by the government and private sector appears to have positively impacted calming market anxiety. Youngjin Ahn, a researcher at SK Securities, said, "The SVB incident was extinguished by the government's guarantee of depositor payments, and for First Republic, which was the next crisis rumor, private major banks stepped in to deposit a total of $30 billion, calming market fears. Early containment of the feared possibility of a banking system crisis transmission is very positive."

With investment sentiment recovering, the KOSPI is expected to reclaim the 2,400 level, but a strong market like that of January is unlikely. Researcher Ahn said, "The recent banking risk reflected a market atmosphere anticipating an immediate recession, so a pullback is expected. However, what has changed before and after the banking incident is that the economic slowdown may accelerate. The KOSPI will recover the 2,400 level but it will be difficult to sustain the strong market mood seen in January and February."

Another researcher said, "The banking issue is expected to conclude without further repercussions, but the market may be subject to frequent adjustments due to mixed economic indicators reflecting the effects of tightening and inflationary pressures, as well as news related to systemic risks."

Market Attention Now Turns to March FOMC

With financial instability calming, market attention is now expected to focus on the March FOMC scheduled for next week.

The previous day, the European Central Bank (ECB) implemented a big rate hike (a 0.5 percentage point increase) despite financial instability caused by SVB and Credit Suisse (CS). The ECB raised its benchmark interest rate from 3.0% to 3.5%.

The U.S. Federal Reserve (Fed) is also expected to follow a similar path. A researcher said, "The ECB's decision to raise rates by 50 basis points (1 bp = 0.01 percentage point), as announced at its monetary policy meeting, indicates a focus on stabilizing inflation regardless of banking sector setbacks. They did not clarify the future rate path. Additionally, the ECB expressed confidence in having tools to provide liquidity support to the European financial system if necessary. This means they are prioritizing inflation over financial stability and intend to address banking liquidity issues through separate support measures. The Fed's rate decision process is expected to be similar."

The market expects the Fed to implement a baby step (a 0.25 percentage point rate hike) at the March FOMC. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the probability of a 25 bp rate hike at the March FOMC exceeds 80%, indicating a continued rate hike trend.

Hyeyoon Lim, a researcher at Hanwha Investment & Securities, said, "The likelihood of a dramatic change by the Fed seems low, and next week they are likely to opt for a 25 bp hike to maintain a stance of price stability at a minimum. Although inflationary pressures have eased, a rate freeze or cut could send confusing signals to the market, which should be taken into consideration."

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