Market endures rate hike… What are the September variables?

This stance resolved market doubts about the Fed's political bias and served as an opportunity to restore the Fed's credibility.

Lee Seon-yeop, CEO, stated, "There was a phrase, 'Kevin Warsh is hawkish.' The hawkishness of Kevin Warsh is synonymous with confidence in Kevin Warsh, if you look at it that way."

This rise in oil prices can trigger a secondary ripple effect, stimulating inflation expectations and leading to widespread price increases.

Lee Seon-yeop, CEO, explained, "There were very strong concerns about secondary ripple effects. The worry that rising international oil prices might not be temporary but could have a long-term impact is what we call inflation expectations, and it's a secondary ripple effect." The Fed is setting its policy direction while being wary of such secondary ripple effects.

Lee Seon-yeop, CEO, emphasized, "If you look at this chart, the green line is the benchmark interest rate. The orange line is the US 10-year Treasury yield. Ultimately, the most important thing is how to control this 10-year Treasury by raising the benchmark interest rate."

It is true that the current benchmark interest rate hike burdens businesses and consumers. However, this level of interest rate hike is not assessed as having enough ripple effect to turn the overall market direction or drastically change the performance of big tech companies currently showing growth.

Lee Seon-yeop, CEO, said, "It's not that there's no burden. Of course, even with this level of interest rate, companies will have wrinkles, and consumers will be significantly affected if they borrow money, but it's not enough to turn the market or change its direction, or to dynamically change the performance of big tech companies currently being reported." A drop in international oil prices is having some positive impact on the market.

While another hike within the year or additional hikes next year are mentioned, if conditions change, such as inflation falling, interest rate projections can also change.

Lee Seon-yeop, CEO, explained, "Currently, on the dot plot, there's a possibility of one more hike within the year or one more additional hike next year, but if data and various surrounding conditions lead to a slight decrease in inflation, it could change, couldn't it?" The Fed chair not indicating a specific dot plot is interpreted as reflecting uncertainty.

This implies that changes in the war situation make dot plot predictions difficult and act as a complex factor in policy decisions.

Lee Seon-yeop, CEO, stated, "Geopolitical uncertainty is high, but the situation with high uncertainty due to the Middle East conflict has partially continued and changed. What I mean is, at that time, it was considered a variable. But now, what is it? It's considered a constant." Geopolitical risks, including the situation in Ukraine, are being reflected in policy, and if war-related indicators ease, expectations for interest rate cuts may rise.

Lee Seon-yeop, CEO, analyzed, "The Fed's decision yesterday, in terms of resolving uncertainty, I would say will remain a positive factor for the market for the time being." It is interpreted as a policy choice to stabilize market conditions.

Therefore, Lee Seon-yeop, CEO, judged that the current situation is not suitable for unwinding the yen carry trade.

Lee Seon-yeop, CEO, stated, "Unwinding the yen carry trade is not advisable now." He explained that the real risk factor for yen carry unwinding would be when the US cuts interest rates and Japan raises them, and the current market does not meet the conditions for yen carry unwinding.

This is due to the increased investment attractiveness within Japan following the recovery of the Japanese stock market and real estate market.

Lee Seon-yeop, CEO, explained, "Although a lot of money was borrowed at low Japanese interest rates, it is highly likely that this money was reinvested in Japan." He diagnosed that while in the past 'lost 30 years,' capital outflow occurred due to a lack of investment opportunities within Japan, the situation has now changed.

It is highly probable that yen carry funds have been reinvested within Japan, and if conditions for unwinding had been established, a massive market downturn would have already been inevitable.

Lee Seon-yeop, CEO, commented, "There's a lot of talk about the yen carry now, but from my perspective, isn't it an excessive worry?" This diagnoses that the concern about yen carry unwinding is exaggerated.

In a strong yen environment, it even became an attractive investment destination, with expectations of exchange rate gains.

Lee Seon-yeop, CEO, mentioned, "Warren Buffett, whenever he woke up, told us for the past few years that he invested in Japan's five major trading houses."

In this situation, export companies should be analyzed by dividing them into three categories according to exchange rate effects.

Lee Seon-yeop, CEO, explained, "Due to the exchange rate effect, the exchange rate for export companies will generally be much lower, but here, I think we need to split it into two axes." It is necessary to carefully examine the performance outlook for each company, considering both export conditions and exchange rate effects.

This low expectation paradoxically leads to a limited impact on the market when negative external shocks occur.

Lee Seon-yeop, CEO, countered, "There are no expectations now. Do you have any expectation that things will be good?" He analyzed that the market is likely to react relatively mildly even to lower-than-expected earnings reports.

While a rising exchange rate imposes cost burdens on companies that import raw materials, it can also benefit some companies. Moreover, in sectors like refining, there are cases where profits paradoxically increase when certain adverse events occur.

Lee Seon-yeop, CEO, stated, "There are quite a few companies, such as those importing raw materials, that also benefit." This suggests that exchange rate and oil price increases do not uniformly affect all sectors but yield different results depending on sectoral characteristics.

Experts who admitted to misjudging the July market diagnosed that investors' market expectations are currently very low. Most investors find it difficult to expect improved performance or stock price increases in the third and fourth quarters.

Lee Seon-yeop, CEO, commented, "Now, whether good or bad, expectations are very low. When I meet investors recently, I cannot find any expectation that the third quarter will be very good, and the fourth quarter will be very good, and that stock prices will rise significantly, and related companies will do very well." Instead, caution about a market downturn is widely prevalent.

The current market prioritizes individual companies' benefits from supply chain changes over overall fluctuations. Therefore, an investment strategy should clearly distinguish between companies with good export conditions and those without.

Lee Seon-yeop, CEO, emphasized, "There are definitely companies that benefit from this. Furthermore, among companies that suffer harm, I think it would be more accurate to differentiate between those with good export conditions and those without." He suggested that finding new opportunities amid supply chain changes is crucial.

In the US-China summit, China is strongly demanding that the US stop or delay arms sales to Taiwan. In particular, there is also a possibility that former President Trump might make some kind of deal with China ahead of the election.

Lee Seon-yeop, CEO, commented, "There's also some concern that what the US gives might harm us, because there are such rumors circulating, and China is demanding more from the US than expected." If industries emerge where China is not completely excluded from the supply chain, it could have unexpected impacts on related domestic industries.

Lee Seon-yeop, CEO, analyzed, "If we assume that inflation data has already factored in three interest rate hikes, at a minimum, I don't think any outcome will determine the direction of the index. Rather, if the PCE inflation data comes out and suggests that three hikes might not be necessary, I think it might not be negative for us." Rather than the conclusions of the US-China summit, unexpected policy changes could pose a greater risk to the market.