Interest Rate Hike: Impact on the Market?

The U.S. stock market did not experience a traditional sharp decline even after the Fed's interest rate hike announcement. Instead, technology stocks, including semiconductors and power machinery, showed an upward trend, while financial stocks, usually considered beneficiaries of rate hikes, declined. This movement differs from past market patterns during rate hike periods, causing confusion among market participants.

The Fed emphasized that this interest rate hike is focused on curbing persistent inflationary pressures rather than stimulating the economy. Chair Powell, at the Jackson Hole meeting, mentioned self-criticism regarding long-standing inflation, explaining that the hike is largely a concluding effort towards the 2% target. The dot plot also suggests gradual rate increases rather than a prolonged sharp rise.

Such movements can create new opportunities for investors utilizing end-of-day trading strategies.

The key to understanding the current market lies in whether this interest rate hike is viewed as the beginning of a new rate hike cycle or as the final connecting step to bring down inflation that has persisted since COVID-19. Since the Fed holds the latter view, traditional beneficiaries and victims of rate hikes do not align with the current market situation. Investors must clearly recognize this and formulate their strategies.

In particular, if the Bank of Japan (BOJ)'s interest rate decision is confirmed, even yen momentum-related headwinds could be resolved, leading to a phase where most major headwinds dissipate. This suggests that market participants' wait-and-see sentiment may gradually ease.

Oil price surges due to geopolitical risks typically form a double top before declining. The current rise in oil prices also shows potential for a peak. While there is significant concern about the U.S. 10-year Treasury yield reaching 5%, considering the average spread between the base rate and the 10-year Treasury yield since the 2000s, 5% falls within the normal range. Applying an average spread of 1.24% to a base rate of 3.75% yields 4.99%, suggesting that, contrary to excessive market concern, it is a reasonable figure based on data.

The stock market interprets this interest rate hike not as the start of a new rate hike cycle, but as a concluding effort to curb persistent inflation. Consequently, unlike the early stages of rate hikes, leading stocks have been maintained, and the market has shown resilience. From a medium- to long-term perspective, if the rate hike is part of the economic normalization process, it could act as a positive signal for the market.

The White House opposes interest rate hikes, arguing there is no demand to suppress, maintaining an economy-centric view. Conversely, the Fed insists that rate hikes are essential to bring persistently high inflation back to normal levels. This Fed policy is assessed as a reasonable choice for inflation normalization.

Nuclear power stocks, which were discussed as a promising sector before Chuseok, encountered variables during the US-Korea trade negotiations. In particular, disagreements between Korea and the U.S. regarding Westinghouse's stake and voting rights were exposed. Korea demanded a 15% stake and voting rights, but the U.S. insisted on a 5% stake and forfeiture of voting rights, and such political risks negatively impacted investment momentum related to nuclear power.

In nuclear power investments, Small Modular Reactors (SMRs) currently lack performance records, and existing nuclear power plant construction performance is also insufficient. Due to these fundamental weaknesses, it is difficult to invest without momentum, and securing new momentum is urgent for the nuclear sector to maintain continuous interest.

Westinghouse was originally a company that developed nuclear engine technology for nuclear submarines, not for building nuclear power plants. Its core assets were patents and proprietary technology rather than facilities and personnel. In the past, it supported Korea's nuclear power plant bidding activities, but its stance has now shifted to being a direct bidding competitor, which intensified the conflict with Korea.

This burden of technology fees is acting as a major factor curbing investment momentum in the nuclear power sector.

Korea demanded a 15% stake in Westinghouse with voting rights, but the U.S. insisted on a maximum of 10% or less, and that too without voting rights. Unable to accept the no-voting-rights condition, Korea ultimately suspended negotiations. Considering that very few countries worldwide are capable of building nuclear power plants, this negotiation breakdown could have a significant impact on the domestic nuclear power industry.

However, if the interest rate hike is perceived as the first increase coinciding with the economic cycle, leading stocks could shift to beneficiaries of rate hikes. The current market reaction leans toward the former, viewing the rate hike as a concluding effort, thus the rebound in tech stocks continues.

Last year, financial stocks were rerated, and their prices had already risen significantly. Therefore, it is analyzed that it will be difficult for bank stocks to surge again as they did during past rate hike periods. At this point, for financial stock investments, it is necessary to lower expectations rather than anticipate large capital gains beyond dividend income.

This week, U.S. futures and options expiry may limit market volatility. There is also a possibility of individual selling during the Chuseok holiday period. Therefore, the effective time to confirm the full market trend and engage in buying appears to be after the holiday. Investors should treat this week as a basic response period and formulate strategies in accordance with market changes after the holiday.