NH Securities "It is premature to expect a pivot from the Bank of Korea despite the sharp decline in the stock market... hike this month"

NH Investment & Securities [005940], although its stock price has recently fallen significantly, believes that the Bank of Korea is not in a position to change its austerity path and maintained its forecast of a 25bp increase in the Monetary Policy Committee's base interest rate in November.

Kang Seung-won, a researcher at NH Investment & Securities, said in a report on the 9th, “It is not a situation where the Bank of Korea can expect a pivot (policy change) based on the stock market right now.”

Researcher Kang pointed out that the plunge in global stock markets following the U.S. midterm elections has increased doubts that the central bank's austerity path may be reexamined.

He analyzed the case from December 2018 to January 2019, when the Federal Reserve (Fed) 'capitulated' to falling asset prices and pivoted monetary policy.

After then-Fed Chairman Jerome Powell said in October 2018 that "the benchmark interest rate is still far from the neutral rate," the S&P 500 fell about 15% until the Federal Open Market Committee (FOMC) in December. Nevertheless, the Federal Reserve raised interest rates in December and hinted at further increases. However, two weeks later, Chairman Powell changed his position, citing ‘patience’.

The report cited the overall tightening of the financial environment as the core of the turnaround. The explanation is that the key condition for the Fed's surrender is that the stock market decline spread to the credit bond market and the financial environment tightened.

Currently, the Financial Climate Index (FCI) in the United States has fallen significantly, but conditions are much more lenient than at the time of the pivot in January 2019. High yield (HY) and investment grade (IG) corporate bond spreads (difference between government bonds and interest rates) are below the pivot level, and leveraged loans (high-risk corporate loans) have rebounded since the second half of October.

Based on this, Researcher Kang judged that expectations of a Fed pivot based on the stock market decline were premature.

The same goes for Korea. The September financial instability index announced by the Bank of Korea was significantly below the risk level, and the financial vulnerability index in the second quarter was at the long-term average level. Considering that the stock market fell sharply again in October, the financial instability index is expected to rise in October.

Nevertheless, he explains, “There is still room to buffer against the risk level.”

NH Investment & Securities this week presented the Treasury bond interest rate range as 3.55-3.70% for 3 years and 3.80-4.00% for 10 years. Last week, 3-year Treasury bonds closed at 3.613% and 10-year Treasury bonds closed at 3.853%.