Short Comment

US Government was shaking the markets. S&P500 plunged more than 3% for the last week with the politics and messages from US Federal Reserve. HangSeng which represents Emerging Markets went down by more than 5%. In fact, HangSeng is plunging by almost 3% in today market. The down led to strong safe assets. Yield of 10year US Treasury is being transacted below 1.8%, and USDJPY is targeting 105.

The main issue which is shaking the markets is the trade-war between the US and the rest of the world. US President Donald Trump announced to impose 10% tariff on $300bn import from China. Considering tariff of last time was 25%, the number of 10% means that there still is the enough room for the negotiation.

However, market participants are losing their rationality for the issue. Intertwined with the concern for coming recession, Research Analysts in the banks are warning that the recession could come much sooner than expected, maybe in three quarter, unless there is appropriate agreement between Big 2. Anyway, the event is proving that the volatility is still living on the markets.

However, markets' fundamental is not dead yet. Global liquidity from major central banks including US Federal Reserve, European Central Bank, and Bank of Japan is playing on the ground, economic situation in the US is still supporting the corporate, and yield spread between 2year and 10year US T-Notes has enough time to touch minus level.

Plunge at this time could be the last 'deep' for 3,200 of S&P500. The trade-war has been 'comes and goes' issue. Now, it is 'Comes.' I believe that 'Goes' will be there soon, and we need to wait for appropriate time to buy the stocks.


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Short Comment

Jerome Powell, Chairman of the institution, announced that the institution lowered Federal Funds Rate by 25bp. Two main grounds for the down were worsening economic indices in Europe, Japan, China, and other EM countries, and sluggish inflation in everywhere. He emphasized that the down is a sort of insurance for coming recession. Main consensus among market participants was the down of 25bp. The other point in the statement was that the institution will end its Quantitative Tightening earlier than expected.

Following messages disappointed the participants. S&P500 went down by 1.09%. Even though the messages did not eliminate the possibility of the additional down, the degree of being dovish was estimated as weaker than expected. Main consensus at this point about the institution's policy is to lower the rate by 25bp again on September or October, and freeze it on December.

In fact, I think that there will be no additional down in this year. Even though market participants are ignoring it, the markets are still having the full liquidity with more than $4tn balance sheets of US Federal Reserve. Stopping Quantitative Tightening will preserve the liquidity intact. We need to consider proceeding provision from European Central Bank and Bank of Japan too.

The US Fed know that its capacity to provide additional liquidity to the markets directly could be the last resort it could take if the concern for the recession was realized. Mr. Powell knows it very well. Using the measure early could delay the recession to come up, but could not block it from happening.

Yield of 10year US treasury is around 2%, targeting 2012's level. Considering regional inflation around 1.5%, the real yield of the security is 0.4-0.6% which is the lowest range in the history. Besides, market interest rates in major markets including Japan, Germany and France are lower than 0% already. However, economic indices in the regions except the US are disappointing the participants, and economists are worrying about the recession raiding the world economy. Just additional down could not encourage the participants to increase their investment and consumption enough to block the recession from happening. Decreasing policy rate sharply could be one of the strongest measures with providing the liquidity to the market directly for the central bank when the recession comes up. It need to be careful to use the measure earlier.

I believe that Mr. Powell and Mr. Draghi are showing prudence in being dovish radically because they know the situation very well. In fact, Mr. Powell would not need to lower the policy rate even on the July meeting, considering the best indices in the region. In the US, economic growth was 2.1% for second quarter, unemployment rate still is 3% level, and manufacturing indices are going beyond the participants' expectation. He knew it very well, so emphasized the down was a kind of insurance.

In video games, we often save the single use strongest weapons until we meet the last boss. We cannot use the last resorts to some peewee monsters. The institution needs to save its weapons for the case. The last boss still has enough time to come up.


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Short Comment

July 26, US President Donald Trump attacked China and South Korea in WTO. The futures of HangSeng and KOSPI200 in the night was looking like fine with the attack, but the indices plunged on next trading day. HangSeng and KOPSI200 fell by 1.03% and 1.65% respectively for July 29. NIKKEI225 and Taiwan Weighted fell just by 0.19% and 0.06% respectively. Mr. Trump did not mention Japan and Taiwan on the meeting.

It proved that the concern for trade-war is still proceeding in the global markets, and the Korean market is very sensitive to the concern. Trade-war between the US and China looks like sleeping, but it could come up and raid the market anytime.

For this time, there are a few grounds why we could accept the plunge as temporary movement. Even though KRW is in bearish momentum recently, the rate of USDKRW went down by 0.11% today. Usually, the degree of the down in regional stock market brings the rise more than 0.8% to the rate. Besides, futures of 10year Korean Government bond went up just by 8 ticks. It could have gone more than 50 ticks with the plunge more than 1% of the stock market. Lastly, the outflow of foreign investors who have the biggest influence on the regional market was limited. They sold just KRW 62 billion for the day.

However, we need to worry about the market. It could be the first victim of coming economic recession. The mention by Mr. Trump could be just one-time issue, but his mention was proving the weakening fundamental of the Korea stock market. Sluggish global manufacturing indices and trade issue with Japan are wringing Korean conglomerates, and the market is reflecting it perfectly.

I still believe KOSPI200 would touch 280, following the US market. The stock market does not reflect fundamental value all the time. However, it could take more time than two weeks. Difficulty the market is going through is becoming stronger.


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