Head of Saxo Strats
Summary: South Korea is the beacon of the global economy due to its many procyclical industries ranging from semiconductors to shipbuilding and thus when South Korean equities are doing bad investors should take note. The KOSPI 200 Index is down a staggering 12.5% during just the past three weeks suggesting the global economy is cooling fast. There is also a spillover effect from the Terra collapse.
Once a while South Korea means a lot
Every time we discuss a global recession South Korea comes back into the conversation because its economy is one of the most procyclical economies driven by exports to the world; as a reason South Korea is used as an leading indicator on the global economy. While China has some of the same characteristics, the South Korean financial system is operating more freely and thus has extra benefits in terms of signal value.
The KOSPI 200 Index, the leading South Korea equity index, is down 12.5% in the past three weeks and down 30% from the peak in late June 2021, which is another interesting observation in that South Korean equities signaled weakness before the Fed pivot in late 2021 and talks about inflation. The recent weakness in South Korea has also coincided with the collapse of the luna cryptocurrency and its associated terraUSD stablecoin, also called UST, which were run by Terraform Labs from South Korea. The crypto collapse has shaken the country and Terraform Labs employees and former employees are not allowed to leave the country while the country is considering much stricter regulation of the crypto industry.
The credit spread in non-financials has also widened to the highest level since 2011 surpassing even the 2020 pandemic high. The warning signals coming out of South Korea are clear and coupled with the first negative 6-month average in the US leading indicators m/m since 2020 (read yesterday’s equity note) are suggesting that global economy is weakening fast.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
