South Korean stocks rebound but still on rollercoaster
Sung-Mi Shim and Ik-Hwan Kim
Aug 06, 2024 (Gmt+09:00)
The Kospi and the Kosdaq rebounded on Tuesday from the previous day's losses (Courtesy of Yonhap) South Korean stocks on Tuesday recouped some of their hefty losses caused by the previous day's global panic selling after financial authorities issued a verbal warning against any excessive market moves.
But expectations of volatility remain high ahead of the release of a slew of data expected to diagnose the health of the US economy and Nvidia Corp., which has led the recent artificial intelligence hype, and additional actions by the Japanese central bank set to sway global capital movements.
Korea’s benchmark Kospi index rebounded 3.3% to end at 2,522.15 on Tuesday, while the smaller tech-heavy Kosdaq bounced back 6% to 732.87. Immediately after the market opened in the morning both indexes shot up more than 5%, triggering sidecars, or halted trading, on the Kospi200 and Kosdaq futures indices, the first case of a sidecar for gains since June 2020.
Their recovery aligned with their Asian peers’ recuperation from the previous day’s pains as US stock futures sprang back from the S&P 500’s worst day and overnight since 2022.
Market heavyweights Samsung Electronics Co. and SK Hynix Inc. climbed 1.5% and 4.9% to end at 72,500 won ($52.72) and 163,700 won, respectively, retrieving some of Monday's losses. Hyundai Motor Co. also added 4.9% to close at 235,000 won.
VERBAL WARNING FROM THE GOVERNMENT
Earlier today, the Korean government and financial authorities held an emergency meeting to discuss Monday’s market crash and warned against excessive moves in the country’s financial markets.
Korean Finance Ministry's emergency meeting with other financial authorities on Aug. 6, 2024 (Courtesy of New1 Korea) “This was an uncommon situation in which only the stock market took a hit from corrections triggered by external shocks,” Korea’s Finance Minister Choi Sang-mok said in a meeting with Bank of Korea Governor Rhee Chang-yong, Financial Services Commission Chief Kim Byoung-hwan, Financial Supervisory Service Governor Lee Bok-hyun and others on Tuesday morning.
“The government and Bank of Korea are well-positioned to take necessary measures against external shocks and market volatility.”
They shared a view that Monday’s rout was an overreaction to concerns about the US economy, the yen-carry trade, geopolitical risks in the Middle East and Big Tech’s high valuation and asked market participants to remain calm and make rational decisions, according to a statement issued after the meeting.
They did not come up with any specific measures to stabilize the market beyond the verbal warning.
The yield on most liquid three-year treasury bonds rebounded to 2.901% earlier Tuesday, up 10 basis points from the previous day.
VOLATILITY REMAINS HIGH
Today’s recovery, however, is considered rather technical after excessive selloffs, and many market analysts expect the market will seesaw for a while, instead of making a quick and sustained V-shaped recovery.
Traders work on the floor of the New York Stock Exchange during the afternoon trading session on Aug. 05, 2024 (Courtesy of AFP via Yonhap) Investors will likely remain anxious until they take clear cues from Nvidia’s earnings release scheduled later this month, which could confirm the sustainability of the AI boom, and the US Federal Reserve’s rate decision in September to gauge the temperature of the US economy.
The key is the size of the Fed’s rate cut, market analysts said. A baby cut of a usual quarter percentage point will likely be seen as a preemptive move to deal with a downturn but a big step of cutting by half a percentage point would be understood as a measure to stop a recession.
The market will also check more US economic data to confirm whether the world’s No. 1 economy is heading into a recession.
CARRY TRADE MAY TRIGGER MORE SELLOFFS
The Japanese central bank is also the center of attention after it hiked its policy rate last week to prevent the country’s currency from weakening further, years after its global peers began aggressively raising rates to tame inflation.
Japan’s belated rate hikes when its peers are set to reverse their rate stance accelerated carry-trade investors’ rush to buy back the yen, leading to the yen’s surge and stock market tumbles across the world.
(Courtesy of News1 Korea) The carry trade is an investment strategy in which investors borrow in the currency of a place where interest rates are low, like Japan, and use it to invest in a currency where interest rates are higher, like Mexico.
The yen has been the most popular funding currency in past years thanks to Japan’s ultra-low interest rate in 15 years but that will not be the case much longer with a sharp gain in its value since last week.
Market analysts blamed the unwinding of the yen-carry for the global market rout yesterday, which also took a heavy toll on the Korean stock market.
Market analysts warn of more capital flights from the Korean stock market if Japanese investors cash out on their Korean stock holdings to unwind their carry trade.
As of the end of June, Japanese investors owned 16.3 trillion won worth of listed Korean stocks, up 8.0% from the end of last year. Their Korean stock holdings have steadily increased since the end of 2022 when they stood at 12.4 trillion won.
Their holdings accounted for 1.9% of total foreign investors’ holdings of Korean stocks but their disposal of Korean stock to cover losses from carry trading would exacerbate the shock to the Korean stock market in combination with other foreign capital flights, market analysts said.
Taking into account possible several headwinds from outside, more sustainable rebounds after today’s recovery will likely be capped, said market analysts, adding that fear still prevails in the market.