Stocks collapse as faster rate increases seen as inevitable
Korean stocks and other financial assets plummeted Monday as expectations for rapid rate rises in the United States grew as did fears about money flowing out of riskier investments and markets.
Losses were deep and across the board, with shares of companies large and small falling, the won declining and cryptocurrencies collapsing.
The Kospi closed down 3.52 percent to 2,504.51 points on Monday as foreign investors sold more than 500-billion-won ($440 million) of index shares. It is trading at levels not seen since late 2020.
Samsung Electronics, which declined 2.66 percent to a new 52-week low, was the most sold stock, followed by Hyundai Motor and SK hynix.
The Kosdaq fell 4.72 percent to 828.77 points, with institutional investors leading the selloff.
Year to date, the Kospi is down 16 percent and Kosdaq index 20 percent.
According to a report in Bloomberg last week, some analysts are starting to anticipate a three-quarter-point rate increase at the next meeting of the U.S. Federal Reserve, which ends on Wednesday.
The Fed has been indicating a series of half-point rises, but with inflation showing no signs of declining, views are beginning to change.
The consumer price index in the United States rose 8.6 percent in May on year, the fastest increase in four decades. Consumer prices in Korea rose 5.4 percent on year in May, the fastest rate in more than 13 years.
Bank of Korea Gov. Rhee Chang-yong has been hinting at further interest rate increases.
Higher interest rates may hurt in the short term, but not making timely adjustments may eventually cause greater damage if inflation remains high, he said on Friday.
The Bank of Korea unanimously raised rates by a quarter percentage point in May to 1.75 percent, the fifth in the current round of tightening, which began in August last year.
"Inflation may remain high longer than the market had initially expected due to the restructuring of supply chains," said Shin Seok-ha, an economics professor at Sookmyung Women's University. "Countries have begun reducing reliance on supply chains of foreign nations, which could extend the supply shortage of key materials, and therefore further drive up inflation."
Analyst Jay Kim from Sangsangin Securities lowered his Kospi projection for the next three months to a range between 2,400 and 2,700 from the previous 2,550-to-2,750 range. The index will bounce back to between 2,600 and 3,000 points in the second half as the global economy, including China, recovers, according to a projection by DS Investment & Securities on Monday.
"High oil prices, high interest rates and a strong dollar are a combination that are not welcoming to the domestic market as they impose great financial costs," said Seo Jung-hun, a senior analyst at Samsung Securities, in a Monday report.
Despite the risks, it will be difficult for central banks to lift rates as rapidly as they did in the 1970s, when rates were taken to near 20 percent in the United States.
"That is because the debt ratio of each economy has grown rapidly as the low interest-rates continued for many years," said Park So-yeon, a chief strategist at Shinyoung Securities, in a report released on Monday.
The won fell more than 1 percent against the dollar on Monday as major investors moved their funds away from emerging economies. At the end of the day, it traded at 1,284 to the dollar, close to the 1,291.50 reached on May 12.
A weaker currency usually creates a favorable environment for exports. But that has not been the case as the value of other global currencies has also fallen, said Lee Jeong-hwan, an assistant professor at the College of Economics and Finance at Hanyang University.
The yen fell to a two-decade low against the dollar last Thursday. Korea and Japan vie in many export categories, including electronics and automobiles.
Korea reported an $80 million current account deficit in April, the first shortfall since April 2020, on a reduced trade surplus, said the central bank last Friday.
BY JIN MIN-JI [firstname.lastname@example.org]