[Good Morning Market] US Stock Market Swallowed by Recession Fears... KOSPI Shock Inevitable

[Image source=Yonhap News]

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[Asia Economy Reporter Minji Lee] The U.S. stock market experienced a sharp decline overnight. The Nasdaq index plunged 3.95%, while the Dow Jones and S&P 500 indices fell by 2.38% and 2.81%, respectively. This was due to heightened concerns over economic slowdown caused by China's COVID-19 lockdowns. Additionally, the strong dollar is expected to make it difficult for investor sentiment to revive in the domestic stock market.

The U.S. stock market sharply declined ahead of earnings announcements from major tech companies. Some firms raised concerns about supply chain disruptions in their earnings reports, and issues related to economic slowdown due to the spread of COVID-19 lockdowns in China are believed to have influenced the market. Among the S&P 500 companies that have reported earnings so far, 80.6% exceeded expectations and significantly outperformed on average, but anxiety about future outlooks is affecting the market.

[Image source=Yonhap News]

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The lockdown in Beijing, China, is also a concern. COVID-19 testing in 11 out of 16 districts in Beijing will continue until the 30th, and depending on the results, authorities will decide whether to lock down the entire city or only certain areas. As a result, the Shanghai Composite Index plunged 5% on Monday and fell 1.44% the previous day.

Accordingly, the domestic stock market is expected to feel the pressure and show a sharp decline of around 1.5%. Key factors to watch closely include the foreign exchange market trends and movements in the Chinese stock market. Furthermore, the dollar’s strength against other currencies amid global economic slowdown concerns is another factor likely to dampen investor sentiment. The Federal Reserve’s tightening cycle, which could increase the possibility of a recession, also appears to be negatively impacting the export-dependent domestic stock market.

It is also important to keep in mind that growth in pandemic-beneficiary sectors is slowing down. In the U.S. stock market, Alphabet reported weak earnings due to concerns over growth slowdown following economic reopening and decreased sales in Russia, leading to a decline in after-hours trading.

The stock market showed a rebound at the beginning of this month but gave up gains due to rising inflation and interest rates. The ongoing Russia-Ukraine war has kept commodity prices high, and lockdowns in major Chinese cities have increased concerns over global supply delays.

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Next month, focus should be placed on themes and companies expected to see revenue growth with the onset of the endemic era. Expectations related to the recovery of sectors such as entertainment, travel, leisure, and airlines?which experienced demand declines during the pandemic?are quickly being reflected in the market. As people begin full-scale outdoor activities, demand improvements are anticipated in the sports industry, offline retail, fashion, and cosmetics sectors.

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With the Russia-Ukraine war ushering in a new Cold War era, global major countries’ military build-ups are expected to raise long-term expectations for top-tier global defense contractors. The increase in raw material prices is likely to continue pressuring companies to raise prices due to higher costs, but it is necessary to increase exposure to companies with strong demand despite price hikes.

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