Wall Street panic spreads to Kospi, which falls 1.5%

Korean markets gyrated wildly on Tuesday, taking a cue from U.S. stocks’ slide overnight and extending a sell-off from the previous day.

The main Kospi bourse opened 2.2 percent lower than Monday’s close and went on to dip more than 2.5 percent in an intraday session. The index, however, recovered somewhat to close at 2,453.31, down 1.54 percent. The junior Kosdaq plummeted more than 4 percent in the morning, but later recovered to decline 0.01 percent to 858.17.

Korea’s representative implied volatility index (VKOSPI), which measures the volatility of the market, reached a two year high, rising 39.22 percent.

Investors fear a more aggressive pace of interest rate hikes from the U.S. central bank, which could end an era of easy money for both companies and individuals.

Dow Jones industrials slipped more than 1,500 points on Monday, while the S&P 500 index dropped 4.1 percent.

“The reason for the market correction lies in the fear of faster-than-expected interest rate hikes by the U.S. Fed, which comes along with record high yields for 10-year U.S. treasury bonds,” said Park Jung-je, an analyst at Meritz Securities.

Lee Ju-yeol, chief of the Bank of Korea, said that the central bank will closely monitor the impact of the volatile U.S. stock markets.

A combination of good jobs reports and other economic indicators could lead the U.S. Fed to accelerate the pace of interest rate hikes from three this year to four. In a FOMC meeting last month, the central bank anticipated inflation would rise this year, ahead of a much-anticipated rate hike in March.

Major investment banks also started to believe there will be four interest rate hikes recently, according to the Bank of Korea on Tuesday.

A report released by the New York office of the central bank noted that of 16 multinational investment banks surveyed, six banks projected four hikes this year, an increase from four previously. Still, nine banks predicted three hikes.

The anticipated rate hikes and healthy economic indicators also contributed to a pumping-up of yields on benchmark government bonds around the world, making stock investments less attractive. The 10-year U.S. Treasury yield jumped to a four-year high on Friday, though it retreated on Monday.

But Park noted that some correction was also taking place in the stock markets.

“Global stock markets performed too well in January and there was little volatility,” he said.

Shin Joong-ho, an analyst at eBest Investment & Securities, noted that the current pullback by investors is a kind of a cooling-off period.

“Historically, a bullish market experiences an adjustment that goes as much as 10 percent,” the analyst said.

He added that the inauguration of a new Fed chairman typically triggers market instability.

“The U.S. markets typically suffer tantrums when or after a new chairman is set to begin his term,” he said, “That is because of a possible change in monetary policy.”

Incoming Fed chief Jerome Powell will preside over March’s monetary policy meeting for the first time. But markets expect no substantial shift in the direction of policy.

Yoon Chang-yong, chief economist at Shinhan Investment, echoed the analysts’ views, saying that local volatility has nothing to do with fundamentals. “Nor is this related to credit risks or liquidity issues.”

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]