Korean stocks still vulnerable to Fed's future policy tightening

The Korea Times

The Korea Times

Finance

Sat, September 23, 2023 | 14:44

Markets

Korean stocks still vulnerable to Fed's future policy tightening

Posted : 2023-03-10 16:51

Updated : 2023-03-11 09:20

U.S. Fed Chair Jerome Powell / AP-Yonhap

Current account deficit soars to record high in January

By Lee Min-hyung

The Korean stock market is expected to display increased volatility until the U.S. Federal Reserve's upcoming rate-setting meeting slated for two days from March 21, according to market analysts Friday.

The outlook comes as the benchmark KOSPI fell below the psychologically-important 2,400-point level after foreign and institutional investors went on a selling spree. The won is also weakening against the U.S. dollar, with Korea's current account setting a record deficit in January.

The Korean stock market tumbled Friday by more than 1 percent, hit by overnight declines of major U.S. stock indices amid prevailing concerns over the Fed's hawkish rhetoric. The Nasdaq fell Thursday by 2.05 percent, while the S&P500 slipped 1.85 percent.

The main KOSPI bourse closed at 2,394.59, down 1.01 percent from the previous session. The secondary Kosdaq also closed with a bigger loss of 2.55 percent during the same period.

"The future movement of the main bourse will be determined by how hawkish the Fed's willingness for monetary tightening will be," Kim Sung-hwan, an analyst at Shinhan Securities, said.

He also left open the possibility of the KOSPI's estimated upper limit rising higher than its earlier forecast if the Fed does not show any surprisingly hawkish rhetoric during the Federal Open Market Committee meeting.

The won-dollar exchange rate also soared to a new high this year on the same day. The depreciation of the Korean won was attributable to escalating uncertainties over U.S. jobs data to be released Friday afternoon.

Robust U.S. job growth numbers in February increase the likelihood of the Fed taking a big step rate hike of 50 basis points this month, under which the won-dollar exchange rate may rise further on investors' growing preference for safe assets.

The exchange rate closed at 1,324.2 won per dollar, up 2 won from a day earlier. The won weakened to around 1,450 won in October last year, the highest since the 2008 global financial crisis. But it abruptly stabilized until January, dropping to below 1,250 won on then-diminished fears of a global monetary tightening.

But it ended up rising again from the beginning of February after the Fed returned to its hawkish rhetoric. The exchange rate is widely expected to show volatility until the Fed's policy meeting on multiple risk factors represented by the delayed completion of the global monetary tightening cycle and economic uncertainties here and abroad.

Data from the Bank of Korea (BOK) showed Friday that Korea reported a current account deficit in January. The country's account balance swung to a monthly surplus in December, but ended up failing to extend the momentum the following month amid sluggish exports of semiconductors.

This is the largest-ever deficit since the BOK started compiling data in 1980. The dismal performance was attributable to a slump in exports of Korea's key export items, such as chips and steel products which reported a decline since November last year.

mhlee@koreatimes.co.kr