[PB Notebook] Preparation Strategies for Changes When Interest Rates Fall

Hana Bank Seoapgujeong Gold Club Center Director Shim Hyejin

Center Director Shim Hye-jin of Hana Bank Seo Apgujeong Gold Club.
[Photo by Hana Bank]

Following the recent Federal Open Market Committee (FOMC) meeting, U.S. Treasury yields fell more sharply than expected due to factors such as declining inflation and weakening consumer indicators. South Korea's market interest rates were also affected, breaking out of the trading range and hitting yearly lows. Although some bank-offered interest rates have decreased, the expectation of an early base rate cut has diminished, so it is unlikely that loan interest rates will competitively drop.

Interest in overseas stocks has grown to the extent that the term "Seohak Gaemi" (Korean investors in U.S. stocks) has emerged. In the U.S., not only rate cuts but also the political cycle can cause short-term volatility, so the upcoming presidential election in November must be taken into account. More importantly, the macro environment and global trends matter. Nowadays, policies such as the Inflation Reduction Act (IRA) repeal, energy production expansion, tax cut extensions, and exchange rates do not always produce the intended results. Of course, preparations should also be made for the possibility of Trump being elected, who prioritizes manufacturing, jobs, and trade gains over innovation. Due to the uncertainty surrounding the U.S. presidential election in the fourth quarter, the third quarter is expected to be the period of peak formation driven by hopes for rate cuts. Compared to the U.S., European stock markets show improved corporate earnings forecasts, but high energy dependence on the U.S. and Eastern Europe, the still unstable Chinese economy with high trade dependence, and the formation of a divided government with a ruling party minority are considered short-term obstacles.

Since last year, rapid yen depreciation has increased investment in yen currency and the Japanese stock market. From a stock market perspective, yen depreciation is positive for the Japanese market, but since April, the correlation between yen depreciation and the stock market has disappeared. The continued yen weakness can no longer be explained by interest rate differentials with other countries, suggesting it may reflect concerns about the Japanese economy. However, due to the global stock market's upward cycle, prices are expected to be maintained to some extent.

Domestic stocks require confirmation of demand for semiconductors and artificial intelligence (AI), where consensus is already high, alongside increased U.S.-bound exports of automobiles, cosmetics, and food and beverages. Short-term volatility due to issues is not expected to deviate significantly from the current KOSPI level.

Bonds should be invested in with consideration of the risk that interest rate volatility may expand again, as it is difficult to predict the timing of rate cuts. Generally, when expectations for U.S. base rate cuts rise, Treasury yields fall and the dollar weakens. However, this time Treasury yields are falling while the dollar is strengthening. Since exchange rates are a relative concept reflecting a country's current level, currencies other than the dollar are weakening, leading to continued dollar strength. Bonds are expected to remain weak until the timing of a confirmed U.S. base rate cut arrives.

Shim Hyejin, Head of Seo Apgujeong Gold Club, Hana Bank

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