Fear of US Giant Step... KOSPI Falls Below 2700 Again

[Asia Economy Reporter Ji Yeon-jin] The fear of U.S. monetary tightening is once again shaking the global financial markets. The trigger was Federal Reserve (Fed) Chair Jerome Powell's statement next month about a 'big step' (a 0.5% increase in the benchmark interest rate). The domestic stock market continues its weak trend, reflecting even the possibility of a 'giant step' with a 75 basis point increase in the U.S. benchmark interest rate.

On the 25th, the KOSPI index opened at 2,676.67, down 28.04 points (1.04%) from the previous day, falling below the 2,700 level again after a week. The KOSPI index has been moving around the 2,700 level since it plunged to 2,614.49 on January 27 this year due to the accelerated tightening clock in the U.S. caused by inflation and fears of the Ukraine war. The weakness on this day is also analyzed as being due to renewed concerns about U.S. interest rates.

Earlier, Fed Chair Powell officially confirmed the 'big step' on the 19th (local time) at a panel discussion hosted by the International Monetary Fund (IMF) in Washington, saying, "A 0.50 percentage point increase in the benchmark interest rate will be on the table at the May Federal Open Market Committee (FOMC)." The big step had already been mentioned in last month's FOMC minutes. Because of this, the market's investment sentiment was greatly weakened as the possibility of consecutive big steps by the Fed and the weakening expectation of inflation peak-out coincided. As a result of the nearly 3% plunge in the three major U.S. indices, the domestic stock market threatened its support line this year as the KOSPI index fell below 2,700 from the opening.

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In the market, the 'giant step' (a 0.75 basis point increase in the benchmark interest rate) remarks by James Bullard, President of the Federal Reserve Bank of St. Louis, are being revisited. Bullard, known as a representative hawk within the Fed, reiterated his claim for a 3.5% increase in the benchmark interest rate within the year at a U.S. Foreign Relations Committee event on the 18th (local time), saying, "Multiple big steps as well as giant steps should not be ruled out." As a result, the probability of a 50 basis point rate hike in May, as forecasted by market participants, jumped to 99.6% as of the 0th. In particular, the probability of a 0.75 basis point hike in June rose from 19.6% on the 13th to 91% within a week, and the possibility of a big step in July was also as high as 84%.The probability that the U.S. benchmark interest rate will rise to 3.0%?3.25% within the year surged to 46.1%, making it the most likely scenario. Lee Kyung-min, head of the investment strategy team at Daishin Securities, said, "The ultra-hawkish monetary policy stance within the Fed is being absorbed by the market," adding, "Considering that many major economic indicators are scheduled to be released at the end and beginning of the month, caution is needed against the possibility that monetary policy burdens and economic instability will simultaneously flow in for the time being."

In particular, volatility may increase further ahead of earnings announcements from major U.S. big tech companies such as Microsoft (MS), Alphabet, Meta, Twitter, Apple, and Amazon, starting at the end of this month.

Some argue that concerns about China's economic slowdown, which had been a downward pressure on the domestic stock market, have eased, lending support to the 'KOSPI bottom theory.' Park Seung-yeon, a researcher at Hanwha Investment & Securities, said, "Typically, the People's Bank of China lowers the reserve requirement ratio by 50 basis points, but on the 16th, it lowered it by 25 basis points," adding, "Opinions have shifted toward the possibility that China's economy may not be as bad as expected, and concerns about China have begun to ease." He added, "Although uncertainties stemming from U.S. tightening and the war remain, I believe that the downward rigidity of the KOSPI has increased as much as the uncertainty about China has eased."

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