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South Korea Bans Short Selling, China Sees Outflows, and the US Housing Market Is in Trouble

Author: Marco Santanche

South Korea short-selling ban

A few days ago, South Korea halted short-selling activity up to June 2024. This fundamental action was taken by the government due to suspicion that there might be an increase in unauthorized short sales in the country's stock market that were affecting fair price formation. This doesn't only impact retail investors: "naked" short selling - where traders sell stocks without owning or even borrowing them beforehand - has been illegal since 2009 (after the financial crisis), but it continues to happen due to discrepancies in rules and systems.

And many investors are intentionally profiting from the situation, including institutional ones. It appears two global investment banks, which have not been identified, are going to be fined by the country's financial regulators due to the "routine and intentional" repeated naked short selling.

However, some fund managers released skeptical statements to the media, suggesting that the move was rather a response to negative sentiment and a sluggish stock market (which, as a consequence of the ban, gained more than 5% on Monday).

This decision also goes against Seoul's aim to become a developed market, as defined by MSCI. Investors will likely be pleased (in general) by the ban, since it could lead the market to artificial gains over the short term, but it reduces the credibility of the business.

China outflows

After a deficit in foreign direct investment (the first-ever quarterly reported one), China is struggling to keep its economy in a positive status for the rest of the year.

The unusually large interest-rate gap might be filled by the geopolitical risk in other areas of the world, head of China economics at Capital Economics Julian Evans-Pritchard said. But is this sufficient?

Surely this will bring some pressure on the FX side, although a response from the government is expected. The RMB was not performing well anyways, given the -4.54% performance against the USD.

The communication also seems to suggest that these are hard times for China. The People's Bank of China urged major banks to limit trading and dissuade clients to exchange the yuan in favor of dollars, trying to control this trend and support their currency. The possible cause for this outflow is indeed multinational companies repatriating earnings, according to Goldman Sachs, such that large volumes of FX conversions from RMB to foreign currencies would add pressure to the PBOC's monetary policies.

A similar trend can be seen in Chinese equities: Morgan Stanley reports a big rebalancing out of China, especially from European investors. This is mainly driven by this year's underwhelming economy and the continued negative momentum for equity investments in the country.

There's no place like home

The US housing market is currently in trouble: prices refuse to fall, according to the S&P CoreLogic Case-Shiller Index. However, mortgage rates (which have been rising for a long time) suffered a small drop in the week where the Fed took a clearly dovish tone, and applications (measured by the Market Composite Index) consequentially rose.

Throughout the year, the high rates have been forcing sellers to cut prices a little bit, but they remained stickier than expected. Today's rates and prices are simply too high, although there is good room for them to fall in the upcoming months, especially if inflation and the economy help. This will likely lead to price cuts through the winter, according to Adie Kriegstein, a real estate agent in Manhattan.

Moody's Analytics predicts a 4.5% drop in the next two years, regardless of the low inventory. As it stands, prices have been rising due to supply issues, rather than demand, and the conditions have become harder and harder due to last year's Fed hiking campaign.

What could happen to the housing sector in stocks? Some equity ETFs will likely benefit from the lower rates, which eventually will lead to keeping demand stable or even increasing, regardless of prices, which normally react slower to adjustments in policies or macro conditions. The iShares US Home Construction ETF (ITB) and SPDR S&P Homebuilders ETF (XHB) could be poised to rally in case the US central bank decides to pause or even reduce rates in the near term, since demand remains high and supply low.

This content is for educational purposes only and is NOT financial advice. Before acting on any information you must consult with your financial advisor.