Korean stocks, won drop over trade fears

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Korean stocks, won drop over trade fears

Seoul’s main bourse dropped again on Friday while the Korean won depreciated over alarming news of an intensifying trade war between the United States and China and the end of the European Central Bank’s quantitative easing policy.

The benchmark Kospi index fell 0.8 percent, or 19.44 points, compared to Thursday to close at barely above the 2,400 level. On Thursday, the market closed down 1.84 percent after losing 45.35 points after the U.S. Federal Reserve raised its interest rates.

The Korean won depreciated by 14.6 won compared to the previous day to close at 1,097.70 won against the greenback. This is the first time in four months that the won has depreciated to the 1,090 won level.

Korean markets started off positively at the start of the day, but they started to fall after news broke out that U.S. President Donald Trump approved a punitive tariff of 25 percent on Chinese imported goods worth $50 billion. China is the most recent target in a long list of countries that Trump has been threatening trade wars with, including U.S. allies such as the EU and Canada.

Chinese President Xi Jinping was reported to have warned the United States to make “wise choices” on trade during a meeting with U.S. Secretary of State Mike Pompeo.

The Chinese government threatened to implement retaliatory tariffs of equivalent size on American goods, including soybeans and orange juice, which may hurt U.S. farmers.

As the possibility of a global trade war grew, Korea wasn’t the only market that responded. The Shanghai index fell 0.8 percent. Hong Kong’s stock market fell 0.03 percent.

The European Central Bank’s (ECB) decision to start winding down its bond buyback program by the end of the year has also spooked emerging markets, including Seoul, that already tumbled the previous day due to the U.S. Fed’s 0.25 percentage point hike.

These actions are expected to encourage foreign investors to pull out of emerging markets.

Korea’s Finance Minister Kim Dong-yeon, however, tried to ease concerns over external challenges to Korea’s economy.

“As of now the impact on the Korean [financial market] is limited,” Kim said on Friday during an economic ministers meeting.

Kim said that despite the Fed’s interest rate hike and the ECB’s recent announcement, Korea has multiple safety nets, including a sufficient amount of foreign reserves and currency swaps.

“However, we are not ruling out the possibility of the recent anxiety in the market, mixed with trade conflicts among major countries and rising international crude prices, affecting [the Korean market],” the finance minister said.

A recent JP Morgan study estimated that trade issues have cut 4.5 percent of the value of the U.S. stock market since March.

“Taking the current market capitalization, this translates into $1.25 trillion of value destruction for U.S. companies,” said JP Morgan’s Marko Kolanovic. “This is about two-thirds of the value of total fiscal stimulus.”

The World Bank, in a report released last week, warned against growing global trade protectionism.

“Uncertainty around global growth projections has risen, partly driven by the possibility of policy shocks from major economies,” the report said. “A worldwide escalation of tariffs up to the limits permitted under existing international trade rules could lead to cumulative trade losses equivalent to those experienced during the global financial crisis in 2008-2009.”

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]
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