The U.S. Federal Reserve raised its benchmark rate for the first time in three years and two months, but the shock to South Korea's stock market was limited. Much of the increase had already been priced in, and the decision instead removed uncertainty surrounding the Federal Open Market Committee meeting. Still, with foreign selling continuing and external variables such as the Middle East war, high oil prices and elevated U.S. Treasury yields unresolved, analysts say oil prices and interest rates must stabilize first if the KOSPI is to break out of its trading range.
The KOSPI closed at 6,715.41 on the 17th, down 2.56 points or 0.04% from the previous session, according to the Korea Exchange. Analysts said the market held up relatively well despite the hawkish U.S. rate increase. Samsung Electronics (005930.KS) ended at 252,500 won, down 0.39%, while SK hynix (000660.KS) closed at 1.745 million won, down 0.80%.
While a sharp correction was avoided, investor sentiment has not fully recovered. Foreign investors have net sold 12.86 trillion won ($9.2 billion) worth of shares on the main board this month through the 17th, and retail investors sold 9.72 trillion won. Investor deposits, funds parked on the sidelines awaiting entry into the market, fell back below 100 trillion won to 99.57 trillion won as of the 16th.
Market participants are watching the direction of long-term rates amid caution over the possibility of another U.S. increase this year. If the Bank of Japan raises rates again on the 18th, concerns over the unwinding of yen carry trades could resurface. Lee Jin-woo, head of the research center at Meritz Securities (008560.KS), said the impact was not severe because the market had already corrected in advance, but added that the mood remains tense. "If the U.S. 10-year Treasury yield begins to entrench itself above 5%, that could be read as a signal that the phase is changing," Lee said.
Crude oil prices in particular are cited as the variable that will determine whether the KOSPI escapes its trading range. If the Middle East war drags on and oil stays elevated, inflationary pressure will build, pushing up long-term U.S. rates and weighing on valuations in the domestic market. Conversely, if the war subsides and both oil and rates stabilize, the KOSPI stands a better chance of regaining upward momentum. Analysts put the upper end at 8,500 if the Middle East war does not escalate further, but said the index could be confined to the 6,000 level if oil above $100 a barrel persists for two to three months or longer. Kim Hak-kyun, head of the research center at Shinyoung Securities (001720.KS), said the base rate the Fed raises has a large effect on short-term rates, while long-term rates are set by the market. "If the Middle East war ends, the risk premium will fall and long-term rates could come down as well," Kim said.
West Texas Intermediate crude fell 3.21% to $102.43 a barrel on the 16th on news of alternative crude supply routes, but remains above $100. Baek Young-chan, head of the research center at Sangsangin Investment & Securities (001290.KS), said the stock market could weaken in November and December if oil stays above $100 through next month. Kang Dae-kwon, chief executive of Life Asset Management, said a swift stabilization of rates and oil prices and an end to the Middle East war are preconditions for a resilient rebound in equities.
Market strategists advised investors to hold some cash and stay on the sidelines while uncertainty persists, while keeping an eye on bank stocks backed by shareholder returns and semiconductor stocks with superior earnings. Jung Sang-woo, head of the ETF division at KB Asset Management, said it could take three to six months or more for the shift in monetary policy stance to take hold after a rate increase. "Building a stable portfolio rather than an aggressive investment portfolio appears advantageous at this point," Jung said.
