US Fed Tightening 'Dow Plunge' VS China's Stimulus Commitment... Where Will KOSPI Go Next Week?

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[Asia Economy Reporter Lee Seon-ae] This week, the KOSPI barely held the 2700 level. Investor sentiment sharply froze due to concerns over the U.S. Federal Reserve's (Fed) tightening and interest rate hikes with a 'big step' (raising rates by 0.5%p at once). Nevertheless, the decline was limited amid expectations for China's economic stimulus measures. Next week, the KOSPI is expected to be influenced by corporate first-quarter earnings, the Fed's tightening, and China's economic stimulus policies.

According to the Korea Exchange on the 23rd, the KOSPI closed at 2704.71, down 23.50 points (0.86%) the previous day. The KOSDAQ closed at 922.78, down 6.90 points (0.74%).

Fed Chair Jerome Powell, on the 21st (local time), attended a discussion on the international economy at the International Monetary Fund (IMF) meeting and said regarding interest rate hikes, "In my view, it would be appropriate to move more quickly," adding, "A 50bp increase will be considered at the May meeting." This statement caused the KOSPI's weakness. It hinted at the possibility of a 50bp rate hike at the Federal Open Market Committee (FOMC) regular meeting scheduled for May 3-4. The market increasingly expects the Fed to take at least three 'big steps' of 0.5 percentage point rate hikes during the remaining six FOMC meetings this year.

Lee Kyung-min, a researcher at Daishin Securities, explained, "Today, foreigners sold futures net over 1 trillion won, worsening the basis, which led to net selling of financial investment spot stocks (out of the 630 billion won net selling by institutions, 540 billion won was by financial investment), increasing downward pressure on the stock market. However, the confirmation of China's financial authorities' willingness to stimulate the stock market helped the Chinese market recover most of its intraday losses, limiting further declines in the KOSPI."

In the KOSPI market, foreigners and institutions net sold 156.3 billion won and 698.6 billion won, respectively. Only individuals net bought 837.6 billion won. In the KOSDAQ market, only individuals net bought 279.6 billion won, while foreigners and institutions net sold 88.2 billion won and 170.3 billion won, respectively.

NH Investment & Securities forecast that the KOSPI will fluctuate between 2680 and 2800 points next week. Kim Young-hwan, a researcher at NH Investment & Securities, said, "This is a time when economic indicators and corporate earnings have become important, and a differentiated market by stock is expected based on first-quarter and annual earnings forecasts," adding, "The biggest question in the current stock market is whether the Fed can successfully achieve a soft landing that stabilizes inflation and the economy while raising interest rates."

The sharp decline in the New York stock market is expected to be a significant burden. The New York stock market experienced its worst day in a year and a half due to the Fed's tightening stance, which has fully turned 'hawkish' (favoring monetary tightening). On the 22nd (local time), the Dow Jones Industrial Average closed at 33,811.40, down 981.36 points (2.82%) from the previous session. According to Dow Jones Market Data, this was the largest drop since October 28, 2020.

The Standard & Poor's (S&P) 500 index closed at 4,271.78, down 121.88 points (2.77%), and the tech-heavy Nasdaq index closed at 12,839.29, down 335.36 points (2.55%). The market froze due to the shock from Chair Powell's remarks at the meeting and the weaker-than-expected first-quarter earnings of major companies.

Meanwhile, China's influence is also expected to be significant. Expectations for China's economic stimulus measures were cited as a factor supporting the stock market, but on the other hand, if China continues its 'zero COVID' policy and lockdowns, the stock market could decline. Signs of economic recession are emerging as China continues lockdowns due to COVID-19. China's March retail sales, announced on the 18th, decreased by 3.5% year-on-year, showing a larger decline than the expected -1.6%. However, the market expects that around May to June, China will introduce economic stimulus measures by lowering the MLF (Medium-term Lending Facility rate) and LPR (Loan Prime Rate).

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