[MarketING] Stagnant Stock Market Amid Unresolved Noise

KOSPI Falls for 5 Consecutive Days and KOSDAQ for 6 Days
Declines Are Small but Investor Sentiment Remains Weak

The KOSPI has continued its decline for the fifth consecutive day. The KOSPI is facing pressure around the 2460 level, while the KOSDAQ, which has fallen for six consecutive days, is threatened around the 810 level. Concerns about an economic recession, inflation instability, debt ceiling negotiations, and the upcoming Group of Seven (G7) summit this week are expected to create ongoing noise affecting the stock market, leading to a sluggish market trend.

KOSPI Falls for Five Consecutive Days

As of 10:20 a.m. on the 15th, the KOSPI was at 2460.76, down 14.66 points (0.59%) from the previous close. The KOSDAQ fell 11.81 points (1.44%) to 810.62.

[Image source=Yonhap News]

The weak close of the U.S. stock market due to recession concerns and inflation instability is interpreted as influencing the domestic stock market. On the 12th (local time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average fell 0.03%, the S&P 500 dropped 0.16%, and the Nasdaq declined 0.36% compared to the previous day.

Sangyoung Seo, a researcher at Mirae Asset Securities, analyzed, "The decline in the U.S. stock market due to the expanded possibility of a recession following weak consumer sentiment indicators will burden the Korean stock market. Additionally, the strong dollar and the sharp rise in government bond yields caused by high inflationary pressures, with the 5-year expected inflation rate reaching its highest level since 2011, are also negative factors." He added, "Uncertainty surrounding the U.S. debt ceiling negotiations is expected to limit active responses from major market participants, leading to a continued sluggish trend."

The University of Michigan Consumer Sentiment Index for May, released on the 12th, recorded a shockingly low 57.7, significantly below the previous month’s 63.5 and the forecast of 63.0. This is the lowest level since November last year. The Consumer Expectations Index, which reflects future economic outlook, dropped to 53.4 from 60.5 the previous month.

On the other hand, inflationary pressures remain high. Consumers’ 1-year expected inflation rate was 4.5%, slightly down from 4.6% the previous month but above the forecast of 4.4%. The 5-year long-term expected inflation rate was 3.2%, exceeding both the previous month’s 3.0% and the forecast of 2.9%. This is the highest level since 2011.

Researcher Seo said, "Although recent declines in the Consumer Price Index (CPI) and others have lowered the probability of a rate hike in June to nearly 0%, the high expected inflation has pushed it back up to 15%. As a result, U.S. government bond yields have surged, and the dollar has strengthened against other currencies, raising concerns about the Federal Reserve’s policy."

However, there is an opinion that the market’s downside rigidity has not been compromised. Jiyoung Han, a researcher at Kiwoom Securities, explained, "While recession fears are increasing and the rise in expected inflation is indeed a concern for the stock market, the market’s downside rigidity appears intact. The decline in consumer sentiment according to the University of Michigan indicators seems to be caused not only by the regional banking crisis but also by the political deadlock over the debt ceiling, which has led consumers to fear a government default. It is important to remember that political factors tend to increase market volatility but do not affect the overall direction."

Noise Difficult to Resolve in the Short Term

Since the noises affecting the stock market are unlikely to be resolved quickly, the market is expected to continue its sluggish trend.

Debt ceiling negotiations, which heightened market anxiety last week, are expected to continue influencing the market this week, while attention will also focus on the G7 summit scheduled from the 19th to the 21st.

Joonki Cho, a researcher at SK Securities, said, "This week’s market is expected to continue a highly volatile trend similar to last week. It will be a week focused on uncertainty factors."

The meeting between U.S. President Joe Biden and congressional leaders, originally scheduled for the 12th, has been postponed to early this week. Researcher Cho said, "It is unlikely that immediate results will come from this meeting, but concerns about a default will grow over time, so the market will closely watch the progress of negotiations. Additionally, according to news reports, the G7 summit is expected to include a statement expressing concerns about China’s economic coercion and confirm a ban on resuming natural gas imports through Russian pipelines by the G7 and the European Union (EU). If these measures materialize, conflicts between Russia, China, and Western countries could intensify, negatively impacting financial markets, so these factors need to be monitored."

The KOSPI, which has continued to fall after breaking below the 2500 level, is expected to find support around the 2400 level. Yujun Choi, a researcher at Shinhan Investment Corp., said, "The lack of momentum due to perceptions of economic downturn limits the upper bound of stock prices, while the reduced influence of interest rates and recognition of earnings bottom limit the downside. Applying the 38.2% retracement of the rise from the 2019 earnings bottom to the current price movement points to the 2400 level as a point where price merit can be confirmed." He added, "The 2400 level is also significant as the lower boundary of the rising channel from the beginning of the year, making it a point where support can be confirmed amid increased volatility."

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