[MarketING] The End of the Tunnel is in Sight... KOSPI Recovers to 2500 Level

KOSPI Rises for Fourth Consecutive Day
Optimism Over US Debt Ceiling Deal and Eased Regional Bank Risks

The KOSPI continued its upward trend for the fourth consecutive day, recovering the 2500 level in early trading. This is attributed to the resolution of the U.S. debt ceiling negotiations and easing concerns over regional bank risks. While the debt ceiling issue had previously acted as a destabilizing factor for the stock market, the formation of expectations for a resolution is expected to gradually reduce the downward pressure on the market.

KOSPI rises for the third day... recovers 2500 level

As of 10:20 a.m. on the 18th, the KOSPI was at 2504.47, up 9.81 points (0.39%) from the previous session. The KOSDAQ rose 2.41 points (0.29%) to 836.60.

[Image source=Yonhap News]

This strength is attributed to the previous day’s U.S. stock market gains driven by the possibility of resolving the debt ceiling negotiations and easing regional bank risks. On the 17th (local time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average rose 1.24%, the S&P 500 increased 1.19%, and the Nasdaq rose 1.28% compared to the previous day.

Sangyoung Seo, a researcher at Mirae Asset Securities, explained, "Although the U.S. stock market failed to reach an agreement on the debt ceiling negotiations the previous day, it started higher thanks to positive evaluations from both the White House and the Republicans. Early in the session, U.S. President Joe Biden expressed confidence in reaching a deal, and House Speaker Kevin McCarthy also stated that a default would not occur, which expanded the gains."

Additionally, news that deposits at Western Alliance Bancorp, a regional bank in Phoenix, Arizona, increased led to a significant rise in financial stocks, driving the index higher. Western Alliance announced in a regulatory report that deposits increased by more than $2 billion (approximately 2.67 trillion KRW) in the second quarter of this year, exceeding expectations. As a result, total deposits reached $49.4 billion, with 79% insured by the Federal Deposit Insurance Corporation (FDIC), the highest coverage ratio among the top 50 banks.

Following last week's announcement of an $1.8 billion increase this quarter, the news that deposits exceeded $2 billion this week highlighted that the previously problematic deposit withdrawals have stopped and customers are returning. This caused Western Alliance’s stock price to rise by 10.19%. Supported by this, regional banks such as PacWest Bancorp (21.66%), Comerica (12.33%), and Zions Bancorporation (12.08%) surged significantly, while financial stocks including Charles Schwab (3.45%), JP Morgan (3.07%), Bank of America (4.42%), and Wells Fargo (5.39%) also showed strong gains.

Jiyoung Han, a researcher at Kiwoom Securities, said, "The domestic stock market is expected to show a favorable price trend as the U.S. stock market’s strength, driven by expectations for a debt ceiling deal and easing fears of bank runs at U.S. regional banks, acts as a positive influence."

Uncertainty from debt ceiling negotiations expected to be short-term

Since last week, uncertainty caused by the debt ceiling negotiations has increased, exerting downward pressure on the stock market. However, as this is a political risk, opinions suggest it will remain a short-term noise.

Ji-yeon Woo, a researcher at IBK Investment & Securities, explained, "The debt ceiling negotiations are expected to be resolved by 'suspending' or 'raising' the existing federal government debt limit just before the 'X-date,' the date when the federal government’s cash reserves run out. The risk of a shutdown or default is not expected to be high." She added, "Although economic uncertainty remains, both parties are unlikely to take political risks that would worsen public sentiment by deepening economic concerns ahead of next year’s presidential election. However, further discussions on the conditions related to raising the debt ceiling are expected, with a higher likelihood of agreeing on a suspension rather than an increase."

Although the X-date deadline is approaching, the recent stock market has remained within a trading range. Woo said, "The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) remains stable, unlike during the 2011 national credit downgrade crisis. This suggests that the debt ceiling uncertainty will eventually be resolved and, unlike the 2011 crisis, is more likely to remain a political risk caused by differences between the parties rather than escalating into credit risk." She added, "The debt ceiling issue may cause market anxiety for a while, but as it is a political risk, it will likely remain short-term noise."

Although noise may arise during the debt ceiling negotiation process, there is no need to react sensitively. Han said, "During negotiations before the X-date, minor disagreements between the parties may surface over major expenditures such as welfare programs and the Inflation Reduction Act (IRA). This could generate news flow involving fears of a default disaster or weakened growth momentum due to reduced government spending, but it is necessary to avoid reacting sensitively to such noise."

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