US Treasury Yields Near 5%…Downward Pressure on Stock Market

Market concerns are escalating as the US 10-year Treasury yield approaches 4.8% and rises towards 5%. This is acting as a major factor in dampening investor sentiment and exerting downward pressure on the overall stock market.

The possibility of an interest rate hike by the Federal Open Market Committee (FOMC) has also risen to 68%, adding to market anxieties about tightening. Furthermore, rising international oil prices, with West Texas Intermediate (WTI) crude surpassing $90, are intensifying inflationary pressures.

These complex factors are fueling investor unease about prolonged high interest rates, and analysis suggests a high likelihood of increased market volatility in the future.

Park Jong-yeon, CEO of MP Partners, stated, "The 10-year Treasury yield is close to 4.8, so it's heading towards 5%. Therefore, the situation is becoming more concerning," expressing a warning about the current situation.

While 4.5% was previously considered a warning sign, a recent wave of optimism in the market suggests that an interest rate rise up to 5% is acceptable. Warnings are emerging that this market logic, based on herd mentality, may not be correct given past crisis cases.

A 5% benchmark interest rate is historically close to the critical threshold that triggered financial crises, indicating that the current optimistic market sentiment may be disconnected from actual economic conditions. Park Jong-yeon, CEO of MP Partners, pointed out the market's complacent perception, saying, "The recent talk is that since it's over 4.5, isn't 5% acceptable?"

If an interest rate hike is implemented in September, analysis suggests there is a very high probability of an additional hike in December, even if there isn't one in November. This can be interpreted as the central bank expressing a strong commitment to prioritizing price stability.

Park Jong-yeon, CEO of MP Partners, stated, "If an interest rate hike happens in September, I think there's a very high possibility it will happen in December, even if it doesn't in November," expressing concerns about a continuous tightening policy.

If the benchmark interest rate rises above 4%, hyper-scaler companies, which raise capital by issuing large-scale bonds, risk a sharp increase in their interest expenses. This could negatively impact corporate financial health and is highly likely to reignite the 'bubble' debate surrounding artificial intelligence (AI) related companies.

Park Jong-yeon, CEO of MP Partners, warned, "If the benchmark interest rate becomes 4% or higher, what really becomes a problem is that the AI bubble argument, which came up last year and again this year, is highly likely to intensify."

Analysis suggests that a high-interest rate environment dampens investment and increases the cost of capital for high-growth tech companies, potentially undermining long-term growth momentum.

It is pointed out that the continuous rise in interest rates, despite a decelerating global economic growth trend, is a contradiction in economic logic. Maintaining high interest rates during a period of structural growth slowdown, rather than a high-growth era like in the past, could burden the economy.

Park Jong-yeon, CEO of MP Partners, pointed out the irrationality of the current situation, saying, "It's not cycling; it's structural growth now. It's very difficult for the growth rate itself to go high like in the past. But interest rates are going up. Growth isn't that high, but interest rates are going up like before—that doesn't make sense."

Comparing the current situation to the period just before the 2008 financial crisis, when the US benchmark interest rate was 5.25%, he emphasized the need for a conservative approach to the asset market. Analysis suggests that interest rate hikes amid low growth rates could lead to an overall contraction in the asset market.

While the overall stock market index may appear somewhat stable, there is a constant possibility that individual stocks held may decline. In particular, investors with a high proportion of large-cap stocks like Samsung Electronics or SK Hynix may see their actual portfolio value decrease, masked by the index's defense effect.

Park Jong-yeon, CEO of MP Partners, cautioned individual investors, saying, "What's a bit more concerning than the overall index is that I saw the day before yesterday that the index was propped up, so the valuation didn't drop much. I'm mentioning this as a concern that those holding Samsung Electronics or SK Hynix might see a continuous decline in their holdings."

South Korea's cumulative trade surplus reached $202.5 billion by last month, a significant increase compared to $40 billion during the same period last year. Concerns are being raised that such a rapid increase in the trade surplus could provoke scrutiny from major trading partners, including the United States.

Park Jong-yeon, CEO of MP Partners, warned of potential external risks, stating, "The cumulative trade surplus by last month was $202.5 billion. It was $40 billion in the same period last year. The trade surplus is so large now that we might have to worry in the future. The U.S. and other countries won't stand idly by. They'll say the trade surplus is too high."

The current market capitalization of the KOSPI market is 6,100 trillion won, with operating profit at 989 trillion won, resulting in a price-to-earnings ratio (PER) of approximately 6x. This is a significantly undervalued range compared to the Asian average PER of 13x.

Park Jong-yeon, CEO of MP Partners, analyzed, "With an operating profit of 989 trillion won, the KOSPI's market cap is 6,100 trillion won. The multiple is just over six times. That's really low. Our market is currently in a very low undervalued range. The Asian average is 13 times. If we only go to eight times, it should be close to 8,000 trillion won. So, it needs to rise by 30% from 6,100 trillion won," suggesting that if the KOSPI recovers to the Asian average, there is about 30% upside potential.

South Korea's 10-year Treasury yield is currently 4.3%, ranking second highest after the US's 4.7%. This indicates a sustained trend of benchmark interest rate hikes in Korea, and high Treasury yields can increase funding costs for domestic companies, negatively affecting the stock market.

Park Jong-yeon, CEO of MP Partners, emphasized, "Our Treasury yield is very high. The US is at 4.7%, and we are second at 4.3%. Our benchmark interest rates are continuously being raised... This is definitely moving in an unfavorable direction for the Korean economy and stock market," warning of the negative impact of high interest rates on the domestic economy and stock market.

Approximately 70% of memory volume from major semiconductor suppliers like Samsung Electronics is already allocated through long-term supply agreements (LTAs) with companies such as Nvidia, Microsoft, and Google. This creates a shortage for the remaining 30% of the volume, leading to a sharp rise in spot prices.

Park Jong-yeon, CEO of MP Partners, explained the situation, saying, "About 70% of Samsung Electronics' volume has already been allocated through LTAs with Nvidia, Microsoft, Google, etc. Since the remaining 30% has to be distributed to others, how strong do you think the shortage would be? That's why prices are continuously surging."

While LTA contracts offer the positive aspect of securing long-term growth, their contract prices, which are 4-5 times lower than spot prices, limit short-term profit maximization. This suggests that semiconductor companies face the challenge of balancing long-term stability with short-term profitability.

A consortium of major US banks has announced plans to issue a dollar-pegged stablecoin in the first half of next year. This project, involving 21 financial companies including Goldman Sachs, plans to expand to include euro-pegged stablecoin issuance in the future.

Park Jong-yeon, CEO of MP Partners, emphasized the importance of this news, stating, "It was announced that a consortium of US banks will issue a dollar stablecoin next year, and this is very important news."

If the issuance of a US dollar-pegged stablecoin materializes, there is a concern that if South Korea does not swiftly prepare its own stablecoin, the domestic market could be encroached upon by foreign payment systems. This could accelerate the entry of global big tech companies like Apple Pay into the Korean payment market.

Furthermore, it could weaken the effectiveness of monetary policy and reduce the market presence of indigenous Korean companies. Park Jong-yeon, CEO of MP Partners, urged swift action from domestic financial authorities and companies, stating, "If Korea doesn't prepare quickly, this could truly become a big problem."

The September stock market lacks clear positive catalysts that could drive it higher. Park Jong-yeon, CEO of MP Partners, assessed, "September doesn't have that. There's nothing particularly favorable coming out right now."

Analysis suggests that a gradual decline, rather than a sharp fall, could have a more negative impact on investor sentiment, and investment sentiment could become even more fragile due to fluctuations in macroeconomic indicators. Expectations for a rebound after the reflection of short-term negative factors are also low, requiring a cautious approach to the market.

In the KOSDAQ market, whether the 20-day moving average, at approximately 6,650 points, holds as support will be a crucial observation point. This support level, currently about 200 points below the index, is expected to be a major indicator in determining future market trends, specifically whether it will hold, form a lower wick, and rebound.

Park Jong-yeon, CEO of MP Partners, explained, "It's at 6,650. It's about 200 points below the current level. At times like these, the key observation point is whether it holds this level and forms a lower wick or not."

Investors need to closely monitor the market's reaction at this support level and maintain a conservative investment strategy.