[MarketING] The Bottom Is Solid but Short-Term Overheating Phase

KOSPI Starts Lower, Falls Below 2610
Growing Concerns Over Short-Term Overheating

The KOSPI opened lower and fell back below the 2610 level. This is attributed to the decline in the U.S. stock market following hawkish remarks from Federal Reserve (Fed) officials. In a situation where concerns about short-term overheating are growing, hawkish comments from Fed officials are expected to act as a factor increasing volatility in the stock market for the time being.

KOSPI Turns Bearish After One Day

As of 10:25 a.m. on the 19th, the KOSPI was at 2,607.35, down 18.44 points (0.70%) from the previous day. The KOSDAQ rose 0.89 points (0.10%) to 888.84. The KOSDAQ started lower but successfully reversed to an upward trend, moving in a slightly positive range.

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Last Friday, the U.S. stock market closed lower due to hawkish remarks from Fed officials and profit-taking. On the 16th (local time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average fell 0.32%, the S&P 500 dropped 0.37%, and the Nasdaq declined 0.68% compared to the previous day.

Han Ji-young, a researcher at Kiwoom Securities, explained, "Although the simultaneous expiration of futures and options contracts and the scheduled market holiday on the 19th had some impact, the U.S. stock market on the 16th closed lower as hawkish remarks from key Fed officials stimulated profit-taking desires despite the University of Michigan's expected inflation easing."

The preliminary University of Michigan Consumer Sentiment Index was 63.9, significantly exceeding the previous month’s 59.2 and the forecast of 60.0. The one-year expected inflation rate was 3.3%, much lower than the previous month’s 4.2% and the forecast of 4.4%. The researcher noted, "These results could have positively influenced the stock market by alleviating recession concerns and strengthening inflation easing expectations. However, with the lingering effects of the June Federal Open Market Committee (FOMC) meeting, which signaled two more rate hikes, and the flood of hawkish remarks from Fed officials, market participants’ selling desires were triggered."

Fed Governor Christopher Waller stated, "The Fed’s mission is to achieve its dual mandate through monetary policy, which currently means raising interest rates several more times to fight inflation." Thomas Barkin, President of the Richmond Federal Reserve Bank, also said, "I want to reiterate the 2% inflation target, and if inflation does not improve, additional hikes would be acceptable."

Seo Sang-young, a researcher at Mirae Asset Securities, said, "It is necessary to note that after the FOMC, hawkish remarks from Fed members continue, showing a divergence from the moderate monetary policy that the market expects. Market participants are optimistic about the pace of inflation decline, whereas Fed members are watching the possibility of inflation becoming entrenched at a high level." He added, "Especially this week, with numerous remarks from Fed Chair Jerome Powell and other Fed members, hawkish comments are likely to continue, which is a burden on the stock market and increases the likelihood of a stronger dollar and rising interest rates."

In a situation where short-term overheating concerns are growing, hawkish remarks from Fed officials are expected to act as a volatility factor in the stock market. The researcher said, "In the upcoming remarks from key Fed officials such as Chair Powell and the New York Fed President scheduled this week, hawkish signals leaving the possibility of a rate hike in July are expected to be sent to the market. Ultimately, not only at this moment when short-term stock price overheating concerns are rising but also until the July FOMC results are announced, the stock market will frequently exhibit volatility using this as an excuse."

Stock Market Bottom Remains Firm but Short-Term Overheating Phase

As the stock market enters a short-term overheating phase, opinions suggest that time is needed to resolve this.

Lee Jae-man, a researcher at Hana Securities, said, "The VIX index (volatility index) of the Chicago Board Options Exchange and the KOSPI 200 options volatility index (VKOSPI) have entered an empirical bottom phase at 13 points. The ratio of 52-week new high stocks within the Nasdaq, which leads the global stock market, and the market capitalization ratio of large-cap stocks leading the domestic market formed a peak last week and have turned downward. This indicates that time is needed to resolve the short-term overheating pattern."

Therefore, it seems difficult for the KOSPI to rise to the 2700 level in a short period. Lee Kyung-min, a researcher at Daishin Securities, analyzed, "It does not seem easy for the KOSPI to surpass the 2650 level and move toward 2700 in a short period. The 2650 level is the first turning point in terms of valuation, as it corresponds to the 12-month forward price-to-earnings ratio (PER) average for this year (12.4 times) and the price-to-book ratio (PBR) average based on confirmed earnings this year (0.97 times)." He added, "Technical indicators are also showing a bearish divergence (where the stock price rises but technical indicators form lower highs) in the short-term overheating zone, so the possibility of increased short-term volatility should be kept in mind."

However, the stock market bottom is expected to remain firm. This is because inflation supporting the Fed’s tightening policy is easing. The researcher explained, "The stock market bottom is expected to be solid, but this depends on conditions such as the disappearance of signals that inflation is under control despite the Fed’s hawkish policy or the resolution of banking sector crises leading to improved financial conditions. Following the May Consumer Price Index (CPI) and Producer Price Index (PPI), expected inflation is also sequentially declining, but attention should be paid to the recent weakening of lending conditions." He added, "Considering this, even if the Fed focuses on blocking market expectations of the end of tightening, it would be appropriate to assume a base scenario of a rate pause at the July FOMC and respond to price changes accordingly."

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