Kospi plunges as Middle East tensions escalate

Economy

Published: 15 Apr. 2024, 18:10

Kospi plunges as Middle East tensions escalate

The Kospi closed down 0.42 percent from the previous trading day on Monday amid intensified geopolitical tension in the Middle East. Electronic displays at Hana Bank in central Seoul show the Kospi and news on the Middle East. [YONHAP]

Korea’s stock market retreated and the won reached its weakest point against the greenback in 17 months on Monday as tensions in the Middle East escalated following Iran’s recent strikes against Israel.

The Kospi fell 1.52 percent during trading before it closed down 0.42 percent, largely led by air carriers and blue chip stocks. Samsung Electronics fell 1.79 percent, while Korean Air Lines dropped 0.98 percent. Asiana Airlines also fell 3.32 percent.

Oil refiners gained ground as hopes for higher petrochemical product prices grew. S-oil rose 1.65 percent.

Foreign and institutional investors net sold 238 billion won ($172 million) and 26 billion won, respectively, as demand for safe haven currencies jumped. Retail investors net purchased 247 billion won.

The secondary Kosdaq, which nose-dived 2.05 percent during intraday trading, closed down 0.94 percent.

The won ended at 1,384 against the U.S. dollar, its weakest level since 1,384.9 won was posted in November 2022.

The volatility prompted the Bank of Korea (BOK) to announce its plans to take market stabilization measures if necessary.

“Up to 30 percent of global crude oil offshore trade can be disrupted if Iran decides to close the Strait of Hormuz, raising the alert for stagflation,” said Kim Chan-hee, an economist at Shinhan Securities in a Monday report.

Impacts on Korea, which relies heavily on imported energy, would follow, he added.

A weak exchange rate can influence the level of inflation, as imported goods become more expensive. Korea’s headline inflation rose 3.1 percent on-year in March, well above the targeted 2 percent.

“Global risk-off trend is expected to strengthen for some time due to the situation in the Middle East, and the volatility of the financial market in and outside Korea could grow depending on the intensity of Israel’s response and the intervention of neighboring countries,” said BOK Senior Deputy Governor Ryoo Sang-dai.

The market grew volatile following Iran’s drone and missile attacks on Israel on Saturday in retaliation to suspected Israeli strikes on an Iranian embassy complex in Syria earlier this month.

The Financial Services Commission (FSC) said that economic uncertainties have been exacerbated by the conflict in the Middle East. But the commission added that “the possibility of its direct impacts on Korea’s financial market is limited, as exposure to Korea’s financial companies isn’t big and conditions to raise foreign currency are favorable.”

Oil supply restraint is another concern. The price of a barrel of Brent crude oil, the international benchmark, jumped more than 10 percent in the past month to over $90 per barrel. But the market shrugged off the tensions on Monday, as the price dropped back toward $90 after initially rising 0.7 percent.

Iran is the third largest oil producer in the Organization of the Petroleum Exporting Countries, with daily production estimated at around 3 million barrels.

“Any attack on oil production or export facilities in Iran would drive the price of Brent crude oil to $100, and the closure of the Strait of Hormuz would lead to prices in the $120 to $130 range,” Andy Lipow, president of Lipow Oil Associates, told CNBC.

The rise in concern for inflation driven by global oil supply and volatile currency exchange rates could alter interest rate outlook.

The BOK signaled the continuation of its restrictive monetary policy last week, citing sticky inflation and unstable oil prices as uncertainties affecting its decision. The central bank said it would keep the policy rate restrictive for a “sufficient” period.

Middle East tensions and the higher-than-expected U.S. consumer prices in March have added to the possibility of a rate hike.

“You have to take seriously the possibility that the next rate move will be upwards rather than downwards,” said Former Treasury Secretary Larry Summers in a Bloomberg TV interview last week.

BY JIN MIN-JI [jin.minji@joongang.co.kr]