[MarketING] Short-Term Overheating and Material Gap... Time for KOSPI to Take a Breather

KOSPI Declines for Second Day
Short-Term Correction Presents Opportunity to Increase Holdings

The KOSPI started lower, continuing its decline for the second day. Investors are adopting a wait-and-see stance ahead of scheduled remarks by U.S. Federal Reserve (Fed) officials this week and the announcement of a cut in China's Loan Prime Rate (LPR) expected today. Although concerns about short-term overheating and a lack of new catalysts may lead to a correction phase, the adjustment is expected to be limited, making a strategy of increasing holdings during the correction effective.

KOSPI Weak for Second Day... Briefly Falls Below 2600 Early in Trading

As of 10:20 a.m. on the 20th, the KOSPI was at 2,607.53, down 1.97 points (0.08%) from the previous day. The KOSDAQ rose 0.19 points (0.02%) to 888.80.

[Image source=Yonhap News]

This weakness appears to be influenced by the European markets' decline while the U.S. markets were closed the previous day, increased caution ahead of a series of Fed officials' speeches scheduled after the holiday, and anticipation of today's announcement on China's LPR cut.

Sangyoung Seo, a researcher at Mirae Asset Securities, explained, "The European markets fell due to profit-taking amid concerns about economic slowdown, which burdens the domestic market. In particular, the strengthening of the U.S. dollar and heightened worries about Fed officials' remarks are additional negative factors."

The market is closely watching whether China will cut the LPR announced today. It is expected that China will lower the LPR, which effectively serves as the benchmark interest rate, to stimulate the economy. The People's Bank of China has kept the LPR unchanged for nine consecutive months until last month. The LPR is an average rate calculated based on the loan rates offered to top-tier customers by 18 designated banks, but in practice, the People's Bank of China decides it considering overall conditions, and financial institutions in China use it as a lending benchmark, making it a de facto benchmark interest rate.

Researcher Seo said, "Following the recent cut in the People's Bank of China's reverse repo rate and announcements of stimulus policies such as infrastructure investments by major Chinese institutions, expectations for an LPR cut in today's decision are high, which is favorable for the stock market. Some market participants believe the possibility of an LPR cut is high because the economic recovery has not met expectations, but others argue that more specific and aggressive measures beyond interest rate policy need to be announced."

China's interest rate decision is also expected to impact the stock prices and supply-demand of major domestic industries. Ji-young Han, a researcher at Kiwoom Securities, said, "Whether China cuts the LPR during the day and whether additional consumption promotion policies are implemented will be key points to watch. The China issue can affect the stock prices and supply-demand of leading domestic sectors such as defense, machinery, steel, chemicals, industrial goods, and materials."

Possibility of Short-Term Correction Due to Lack of Catalysts

Concerns about short-term overheating are growing, and the market is expected to enter a period lacking new catalysts, leading to a short-term correction.

Junho Byun, a researcher at IBK Investment & Securities, said, "The recent sharp rise in the stock market has reduced the merit of short-term investment timing. Market participants need to find additional buying catalysts for further momentum, but a lack of new catalysts may occur." With the second-quarter earnings season approaching, earnings could provide additional momentum, but until the outline of the second-quarter results emerges, a lack of catalysts is inevitable.

Given the concerns about short-term overheating, preparations for a pause or consolidation phase are necessary. The researcher said, "Major markets such as the KOSPI, S&P 500, and Nasdaq have been on an upward trend, recording positive gains for more than five consecutive weeks, but some data suggest the need to prepare for intermittent pauses." The Bull-Bear Spread, a weekly sentiment indicator of individual investors, reached +22.5 basis points (1bp = 0.01 percentage points) as of the 15th, the highest since November 2021. The researcher analyzed, "The average Bull-Bear Spread this year was -10bp, indicating that individual investors' sentiment had been pessimistic for some time, but since June, optimism has surged rapidly, and despite digesting the May Consumer Price Index (CPI) and the June Federal Open Market Committee (FOMC) meeting, a positive atmosphere is spreading quickly in the stock market."

Although a short-term correction is expected, the extent of the adjustment is likely to be limited. Researcher Cho said, "Until the outline of the second-quarter earnings season becomes clear, the market may show a short-term correction due to a lack of catalysts, but since the correction is expected to be limited, it is necessary to establish a strategy to increase stock holdings during the correction rather than excessive risk management."

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