[MarketING] Stock Market Unable to Find Direction Amid Uncertainty from the US

KOSPI and KOSDAQ Slightly Lower
Stalled Amid US Debt Ceiling Negotiation Failure and CPI Awaiting

The KOSPI has been showing weakness for the second consecutive day. Investor sentiment is shrinking due to uncertainties originating from the U.S., causing the index to struggle to find direction. With the debt ceiling negotiations failing to reach an agreement and the upcoming release of inflation indicators, market caution is expected to deepen.

KOSPI, Weakness for Two Consecutive Days

As of 10:15 a.m. on the 10th, the KOSPI stood at 2,506.18, down 3.88 points (0.15%) from the previous day. The KOSDAQ fell 1.12 points (0.13%) to 834.73.

[Image source=Yonhap News]

The previous day’s weakness in the U.S. stock market, influenced by debt ceiling uncertainties and caution ahead of the April Consumer Price Index (CPI) release, appears to have affected the domestic market as well. On the 9th (local time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average fell 0.17%, the S&P 500 dropped 0.46%, and the Nasdaq declined 0.63% compared to the previous day.

U.S. President Joe Biden and congressional leaders discussed raising the debt ceiling but failed to reach an agreement, adding pressure to the stock market. Biden and congressional leaders are scheduled to meet again on the 12th. If the debt ceiling issue is not resolved, there are concerns that the U.S. federal government could default as early as the 1st of next month. U.S. Treasury Secretary Janet Yellen stated on the 7th during a broadcast, "We have been taking extraordinary measures for several months, but even those are running out," adding, "If Congress does not raise the debt ceiling, there will come a day in early June when bills cannot be paid." The U.S. exhausted its $31.4 trillion debt ceiling in January. Moody’s warned that a U.S. default could reduce gross domestic product (GDP) by 4% and result in a loss of 6 million jobs.

The market ultimately expects an agreement but anticipates increased volatility. Sangyoung Seo, a researcher at Mirae Asset Securities, said, "Considering that past debt ceiling issues have always been resolved with last-minute urgent agreements, the market expects a resolution despite short-term volatility. However, given the current political division, there is uncertainty about the final outcome, and the possibility of escalating controversy cannot be ruled out."

Regarding the debt ceiling increase, it is advised to respond according to future developments rather than proactively changing strategies. Nogil Roh, a researcher at Shinhan Investment Corp., explained, "There is no need to preemptively change strategies based on the possibility of a U.S. default. What should be considered is whether Congress or the executive branch holds the initiative during negotiations. If the executive branch loses control, reductions in various government expenditures could affect domestic stock sectors." He added, "Rather than pondering directionality, it is an area where responses should be based on future developments."

Market Awaits CPI Release with Cautious Trading

With the U.S. April CPI release scheduled for tonight, the market is expected to engage in cautious trading.

Jiyoung Han, a researcher at Kiwoom Securities, said, "The market, which digested major events such as the early-month Federal Open Market Committee (FOMC) meeting, Apple’s earnings, and employment data well, appears to have entered a cautious phase this week while awaiting the CPI results. This is because the CPI outcome could determine whether the gap between the Federal Reserve’s (Fed) interest rate path and the market narrows within the year."

According to current market consensus, the CPI is expected to rise 5.0% year-over-year, the same level as the previous month. The core CPI, which excludes volatile energy and food prices, is forecasted to decrease slightly to 5.5% from 5.6% the previous month.

However, concerns have been raised that gasoline prices, which rose significantly in April, could push the CPI higher than expected. Han said, "The key points to watch in this CPI release are the possibility that overall inflation may increase compared to last month and whether the inversion between CPI and core CPI, which appeared last month, will continue." She added, "If the April CPI exceeds 5.0%, it could disappoint the stock market, which has been betting on Fed rate cuts based on easing inflationary pressures. Given that inflationary pressures on goods, services, and housing costs persist until June, the inversion between CPI and core CPI may continue, but it is appropriate to assume a base scenario where the relationship normalizes thereafter."

If the core CPI remains high, it could be a factor increasing volatility. Researcher Seo said, "Gasoline prices have been falling in May, unlike last year’s rise, and the CPI may also decline again in May, so the impact of April’s index increase will not be significant. However, the core CPI may remain firm, making short-term volatility inevitable."

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