[MarketING] US Recession Concerns Stimulate Safe Asset Preference Sentiment

KOSPI Turns Down After 3 Days
Foreigners Sell More Amid Dollar Strength

The KOSPI fell for the first time in three days, dropping to the 2470 level. This is interpreted as a result of concerns over a U.S. economic recession stimulating a preference for safe-haven assets. Fatigue from the recent rally also played a role, suggesting that the domestic stock market will undergo a process of digesting sell-offs.

KOSPI Weakens for the First Time in Three Days

As of 10:25 a.m. on the 6th, the KOSPI was at 2477.40, down 17.81 points (0.71%) from the previous day. The KOSDAQ fell 6.44 points (0.74%) to 865.92.

[Image source=Yonhap News]

The expansion of safe-haven asset preference due to concerns over a U.S. economic recession is seen as leading to weakness in the domestic stock market. The U.S. stock market closed mixed amid recession worries the previous day. On the 5th (local time) at the New York Stock Exchange, the Dow Jones Industrial Average rose 0.24%, while the S&P 500 fell 0.25% and the Nasdaq dropped 1.07%. Sangyoung Seo, a researcher at Mirae Asset Securities, analyzed, "The U.S. stock market started mixed amid concerns over slowing employment, but as the Institute for Supply Management (ISM) services index contracted sharply, recession issues persisted and the decline widened. Notably, the preference for safe-haven assets strengthened, leading to a strong dollar and a significant drop in tech stocks."

Amid a series of weak U.S. economic indicators, the previously released March ISM services index and the U.S. private employment report from Automatic Data Processing (ADP) both fell short of the previous month's figures and expectations, indicating a rapid pace of economic slowdown. The U.S. March ISM services index was 51.2, below the previous month's 55.1 and the expected 54.4. New orders shrank sharply from 62.6 to 52.2, and new export orders also plunged from 61.7 to 43.7, signaling a pessimistic outlook.

In the U.S. March ADP private employment report, nonfarm employment was only 145,000, significantly below the previous month's 261,000 and the expected 200,000. Jiyoung Han, a researcher at Kiwoom Securities, explained, "The shock in March ADP private new employment seems to be creating vulnerabilities in the solid employment market base that was the main driver of the no-landing recession scenario. Furthermore, the simultaneous sharp decline in March ISM manufacturing new orders and services new orders increases the possibility of a recession due to weak real demand." The previously released U.S. March ISM manufacturing index was 46.3 (previous month 47.7), below the expected 47.5, marking the lowest level since May 2020. New orders fell from 47.0 to 44.3.

The decline in U.S. new orders is also expected to negatively impact earnings forecasts for the KOSPI. One researcher said, "U.S. new orders are closely related to forward demand affecting the performance of key domestic export stocks such as semiconductors and automobiles. Therefore, if the recession deepens, it could negatively affect the earnings outlook of the KOSPI, which is currently undergoing a bottoming process."

Concerns over a U.S. economic recession have stimulated safe-haven asset preference, leading foreign investors to show a net selling bias. On this day, foreigners were net sellers of 236.6 billion KRW in the KOSPI market and 187.6 billion KRW in the KOSDAQ market. Futures were sold in excess of 1 trillion KRW.

Index Movement Dependent on Foreign Investor Flows

Since the recent stock market moves are driven more by supply and demand than by fundamentals, the direction of the index is expected to be determined by foreign investor flows.

Researcher Seo said, "The domestic stock market will undergo a process of digesting sell-offs. Considering the index rise due to foreign investors' futures flows the previous day, attention should be paid to foreign investor flows."

Attention should also be paid to the exchange rate, which is highly influenced by foreign investor flows. Yujun Choi, a researcher at Shinhan Investment Corp., explained, "Despite the U.S. stock market's weakness due to poor employment data the previous day, the domestic stock market rose sharply because it is reacting more sensitively to the weak dollar than to fundamentals." The won-dollar exchange rate, which had fallen for two consecutive days, opened at 1316.5 won in the Seoul foreign exchange market, up 6.0 won on the day.

One researcher noted, "Although the U.S. stock market is closed on the 7th, attention should be paid to the release of the U.S. March nonfarm payroll data. Employment data results are usually reflected immediately in the U.S. stock market on Fridays, but this time they will be reflected on Monday next week. Therefore, it is necessary to prepare for the possibility of foreign investors adopting a wait-and-see attitude during the remaining trading days of this week in both the U.S. and Korean stock markets."

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