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Expectations of interest rate cuts amid the SVB crisis… tech stocks impact

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The bankruptcy of Silicon Valley Bank (SVB) has heightened uncertainty in the financial market, raising expectations that the U.S. Federal Reserve (Fed) will cut its benchmark interest rate. If interest rates are frozen at the Open Market Committee (FOMC) in March this month and the trend of full-scale cuts is reversed, interest in technology stocks, which have been adjusted due to austerity, is expected to grow again.

According to the financial investment industry on the 14th, on the 13th (local time), the Chicago Mercantile Exchange (CME) Fed Watch showed a 41% chance of freezing the FOMC benchmark rate in March. Until a day ago, the market saw the probability of freezing the Fed’s base rate at the March FOMC as 0%. That’s a 41% increase in just one day.

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The high probability of a rate freeze is due to the SVB bankruptcy. SVB was the 16th largest bank in the United States. However, it announced a plan to raise $2.25 billion to cope with a loss of $1.8 billion in bonds, but eventually went bankrupt as a bank run continued, in which Silicon Valley companies withdrew their deposits due to concerns about bank risks.

Experts interpreted that the cause of the SVB bankruptcy was the result of the Fed’s strong tightening. SVB held more than 25% of its portfolio in long-term bonds. However, bond losses occurred as government bond yields rose due to the US interest rate hike. In addition, as it was conducting business centered on Silicon Valley companies, the contraction of the initial public offering (IPO) market and reduced liquidity due to austerity put a burden on it.

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As a result, expectations for a rate freeze are rapidly spreading in the market, and even expectations that the base rate will be lowered from June are blowing.

According to FedWatch, the FOMC’s expectation of a 25bp rate cut in June has risen to 19.9%. Until a day ago, the market’s expectation of a rate cut in June was zero. In particular, the forecast of a 50bp hike also rose slightly to 2.8%.

In the meantime, the market has prevailed over the prospect that the base rate will be raised three times by the first half of the year and lowered from the second half. However, expectations for a 25bp cut in June are now starting to be reflected. The expectation that interest rates will be cut by 25bp in July at the latest is the highest at 40.7%, and the expectation that interest rates will be lowered by 50bp in September is at the highest level at 36.9%.

As a result of the FOMC coming here in December, the prevailing view is that the end-of-year US interest rate will be lowered to 3.75-4%. Putting this together, the market expects at least three baby steps from June, starting with the interest rate freeze this month.

If the tightening process ends with the market’s outlook, technology stocks could stand out again. In the meantime, major domestic technology stocks such as Naver and Kakao have been sensitive to interest rates.

As of today, while the domestic stock market is on the decline, most of the stocks that foreigners are buying are growth stocks. As of 10:00 am, Kakao Bank, Kakao, and Kakao Pay were listed as the top stocks in foreign net purchases. In particular, Kakao is steadily net bought by JP Morgan right after the market opens.

Accordingly, experts advise paying attention to financially sound companies among growth stocks and technology stocks. This is because small-scale growth stocks can show large volatility until the market stabilizes. Previously, on the New York Stock Exchange, the Russell 2000 index, which is mainly listed on small and medium-cap technology stocks, plunged sharply.

Kang Jae-goo, a researcher at Hanwha Investment & Securities, predicted, “If the Fed’s stance of high-intensity monetary policy changes, investors’ burden on investing in growth stocks may be somewhat reduced.”

Source: Donga

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