[MarketING] Steps Grow Heavy Again Amid US Recession Concerns

KOSPI Starts Up but Turns Down
Recession Concerns Hinder Index Rise

The KOSPI index started higher but then turned lower. With the U.S. stock market holiday approaching, cautious sentiment expanded, and concerns about a U.S. economic recession emerged, blocking the index's rise. There is a forecast that volatility may increase as positive investor sentiment clashes with recession worries.

KOSPI Turns Lower After Starting Higher

As of 10:25 a.m. on the 4th, the KOSPI stood at 2,598.32, down 4.15 points (0.16%) from the previous day. The KOSDAQ fell 1.77 points (0.20%) to 887.52.

[Image source=Yonhap News]

The failure of the KOSPI and KOSDAQ to maintain their upward momentum and their subsequent decline appears to have been influenced by the previous day’s U.S. stock market closing flat amid concerns over economic contraction. On the 3rd (local time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average rose 0.03%, the S&P 500 increased 0.12%, and the Nasdaq gained 0.21%, all closing slightly higher.

Han Ji-young, a researcher at Kiwoom Securities, analyzed, "The U.S. stock market on the previous day opened higher supported by Tesla’s strong second-quarter delivery figures ahead of the early closure for Independence Day, but the upper limit was capped due to the weak ISM manufacturing index and profit-taking selling."

The U.S. ISM manufacturing index for June recorded 46.0, marking the lowest level since May 2020. It fell short of both the previous month’s 46.9 and the forecast of 47.3. The new orders index rose from 42.6 to 45.6, but the production index dropped from 51.1 to 46.7.

However, this recession concern is believed to have already been somewhat priced into the stock market. The researcher said, "Since June, both the U.S. and Korean stock markets have shown signs of a capped upside but also a solid downside, suggesting that the market has largely priced in the issue of a U.S. recession. Although new orders fell below the economic benchmark of 50, the rebound supports a gradual entry into recession."

While there is room for further adjustment due to recession concerns, the likelihood is expected to be low. The researcher added, "At this point, there is room for the market to adjust once more as it prices in recession, but this would require major indicators to deteriorate significantly, delaying the bottoming of corporate earnings amid a severe recession or the banking sector’s problems spreading throughout the financial system. The likelihood of these conditions materializing appears low." He continued, "Currently, major sentiment indicators point to short-term overheating in stock prices, so profit-taking pressure may frequently arise using recession or other specific market-based factors as an excuse, but it is appropriate to avoid strategies that bet on a market downturn."

Concerns about U.S. economic contraction are also expected to affect the recently subdued foreign buying trend. Seo Sang-young, a researcher at Mirae Asset Securities, said, "Although positive investor sentiment at a high level has driven index gains, the expanding economic slowdown shows that foreign demand for the Korean stock market remains negative, which could be a burden. The clash between positive investor sentiment and economic contraction will continue to increase volatility."

Volatile Market Expected to Persist for the Time Being

Volatility is expected to continue amid concerns over tightening and recession.

Kim Young-hwan, a researcher at NH Investment & Securities, said, "Recently, foreign funds have concentrated only on semiconductors while selling other stocks, preventing broad market participation. The turning point will be the second-quarter earnings season, but until policy uncertainties decrease and expectations for earnings momentum rise, volatility will persist."

With earnings forecast upgrades slowing, a defensive strategy is advised. Lee Jae-man, a researcher at Hyundai Motor Securities, said, "The consumer price index (CPI) release, which could determine the possibility of a Fed rate hike in July, and the U.S. earnings season starting in mid-July, are likely to result in a period of sideways adjustment without meaningful direction. The KOSPI entered a phase of reduced buying strength after the June U.S. Federal Open Market Committee (FOMC) meeting, and the overall pace of earnings estimate upgrades may also enter a pause phase, so it is advisable to respond with strategies that enhance defensive capabilities."

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