Why Kim Hyun-suk’s Wall Street Now could still be a bomb

On the 25th (local time), the New York Stock Exchange was a Washington dominated day.

On this day, the mayor went back and forth without a clear direction, keeping an eye on three events in Washington. The rise in valuation, the spread of coronavirus, and the rebalancing of pension fund funds in the first quarter helped also confusion.

However, after 2:30 p.m., the sales trend was concentrated in the second half of the market, and the NASDAQ, which remained in the negative range, ended with a slight plus. The Dow rose 0.62%, the S&P 500 rose 0.52%, and the Nasdaq closed 0.12% higher.

Economically sensitive stocks such as aviation casinos and banks showed an overall uptrend. With the exception of Apple, which rose by 0.42%, all FAANG stocks declined, while high-value technology stocks were mixed. On this day, the 10-year Treasury Treasury bond yield was stable in the early 1.6% range, but technology stocks are still not gaining strength.

The weakening of large tech stocks that day seems to be due to a hearing in Washington. The US House of Representatives called on Facebook’s Mark Zuckerberg, Twitter’s Jack Doshi, and Google’s parent company Alphabet’s CEO Sundar Pichai on the subject of’Extremeism and the Promotion of Misinformation and the Role of Social Media’. I have had a hearing over time. Lawmakers have criticized social media for creating political conflict, disseminating misinformation about the corona vaccine, and creating a dangerous environment for children. Congressman Angie Craig pledged strong legislative regulation, saying, “The industry cannot be trusted to regulate itself.”

In addition, President Joe Biden held a single press conference for the first time since his inauguration. He says fierce competition with China will be inevitable, but he says China will never become the strongest nation for his generation. He added that in order to do that, you have to make a huge investment. It also said that with allies, China will be held accountable for issues such as the South China Sea, Taiwan, Hong Kong and Xinjiang Uyghur issues. It also proposed a plan to increase vaccination to 200 million times by the 100th day of inauguration. President Biden has criticized Congress for the abuse of’filibuster’, and has also expressed his willingness to push for tax increases and infrastructure legislation.

Wells Fargo said that “the economic recovery will be strengthened” and that it could be a boon for the financial, industrial, and material sectors that benefit from the economic recovery. A Wall Street official said, “Recently, there are a lot of old people in Manhattan restaurants,” he said.

In Washington that day, Jerome Powell, chairman of the US Central Bank (Fed), also appeared on the US Public Radio (NPR) at 7:30 in the morning. It’s a fact that many people miss, but the Fed is based in Washington, not New York. Among the three events in Washington that day, Powell’s words were the most influential.

In fact, until the morning before the opening of the regular market on this day, the index was showing good performance in the futures market. But when it became known that Chairman Powell had said that “we will get rid of support when the economy is near full recovery,” it turned down, and the leading index continued to decline even in the market that opened at 9:30 am.

“There are no plans to slow down the pace of asset purchases until the economy progresses significantly further. The process will be very transparent and significant further progress will be needed to withdraw support,” said Powell I will get rid of it.” Analysts have flowed about whether this is a statement with tapering (reduction in asset purchases) and interest rate hikes in mind. A Wall Street official said, “This is what I’ve been talking about, but it sounded like the point of tapering was approaching,”

The number of weekly unemployment insurance applications at 8:30 am on the same day fell to 684,000, down 97,000 from the previous week. I did.

There are several reasons to listen carefully to Powell.

First of all, on the 23rd, the Central Bank of Canada announced its intention to suspend some market liquidity programs that it introduced last year during the Corona 19 crisis. It also suggested the possibility of slowing down the pace of quantitative easing (QE). On the same day, the New Zealand Central Bank also decided to review the housing market situation together when making monetary policy decisions. That means interest rates can be raised given soaring house prices. Already emerging countries such as Russia, Brazil and Turkey raised interest rates once in March. A Wall Street official interpreted, “As the corona spread is down, the world’s central banks are beginning to step out of easing policies little by little.” Powell’s words can also be interpreted on that line.

This is why the Fed decided last week to stop extending the supplementary leverage ratio (SLR) easing measures contrary to market expectations. “The Fed’s failure to extend SLR measures is the first step towards tightening easing monetary policy,” said Bob Michel, CIO of JPMorgan Investments Management.

On this day, the Fed announced that it would allow dividends and treasury stock purchases from banks, which had been banned after the corona crisis last year, after June 30. This is also a return to the emergency measures taken during the pandemic crisis one by one.

“The problem affects interest rates,” a Wall Street official said.

The US Treasury Department’s 7-year government bond bid that day was disappointing. The winning bid rate was 1.30% per year, 2.5bp higher than the market rate before bidding. In addition, the bid rate was 2.23 times, which was better than 2.04 times that of the end of February, when the blue was called, but it was the fourth lowest ever. The average is 2.28 times. However, the successful bid rate of overseas investors was 57.3%, up from 38.1% in February. When the 7-year bidding result was announced, the 10-year interest rate, which fell below 1.60% before, jumped to 1.64%.

A Wall Street official said, “7-year bonds are originally unpopular, and the root cause is that there are so many government bonds issued in recent years.” Last year, when a government bond bid was made, it was around $30 billion at a time, but these days it is mostly over $60 billion. On this day, the 7-year product also released $62 billion. In particular, the Treasury Department sold all of the stock even though the issue rate went up.

Why are they offering so much government bonds? First of all, a fiscal stimulus plan of $1.9 trillion is being implemented at the end of last year, followed by $900 billion at the end of last year. And, as President Biden expressed his strong intentions on this day, a large-scale infrastructure deal is also being promoted. The typical US fiscal deficit was recently estimated at $1 trillion per year, but this year it is estimated to be at least $4 trillion.

In addition, the US Treasury Department increased the issuance of government bonds last year, focusing on short-term bonds, but has recently shifted to long-term bonds. When interest rates are low, it is interpreted as an intention to increase long-term issuance.

Still, it’s still bearable. The US Treasury Department issued a large number of Treasury bonds last year and deposited them in the Fed’s Treasury Account (TGA). That money once amounted to 1.8 trillion dollars, and not long ago, was around 1.6 trillion dollars. The Treasury is spending that money first. That day, it fell to 1.1 trillion dollars, so this year, more than 500 billion dollars have already been taken out of bank accounts instead of issuing government bonds.

A Wall Street official said, “Looking at the size of the stimulus, we will use all of the money in the TGA account quickly.” He said, “The US Treasury Department issued all the quantities even though the interest rate rose when the 7-year bond was issued today,” he said. “This may be the will to endure higher interest rates.”

Powell says the recent rise in interest rates is a natural phenomenon due to the economic recovery and the spread of vaccines. Instead, we are talking about the hiring of blacks and latinos. It sounds like “I won’t care if interest rates rise. I’ll focus on the job market.”

A Wall Street official said, “Even if the interest rate rises, the Fed will not come up with any countermeasures unless the financial market is greatly shaken.” “Wouldn’t it be weird if we announced it?”

A slight increase in interest rates right now doesn’t add much to the federal burden. According to statistics
The duration of federal government debt averages 7 years. Even if the interest rate rises a little, the interest burden does not increase quickly. Chairman Powell said in an NPR interview that day, “There is no problem that the US will not be able to pay off its debts now or in the near future given the low interest rates.”

In addition, he continues to say that “the price of some assets is high.” It also sounds like an increase in interest rates and that the asset price should drop a little.

Of course, even when the 10-year water rate rose from 1.5% to 3% from 2013 to 2018, the bull market of the New York Stock Market continued. It may not be a big deal as long as the game is getting better as the Fed expects.

Reporter Kim Hyun-seok [email protected]