Foreigners Sell 1.4 Trillion Won in Stock Market Fear, Government Repeats ‘Debt Response’ for Domestic Use
As the Korean stock market is facing a selloff of 1.4 trillion won due to fears over a US recession and the sharp drop in the dollar, the Korean government announced a ‘real response’ policy for domestic investors.
On the 5th, Financial Services Commission Chairman Kim Byung-hwan announced, “The fundamental factor that makes our financial system vulnerable to external shocks is the high debt ratio and debt dependency compared to major countries,” and “The task of debt response does not mean reducing the absolute size of debt, but stabilizing debt to an appropriate level in connection with the real economy,” and announced a policy of ‘transitioning the financial structure from debt-centered to capital-centered.’ On the 5th, the Ministry of Strategy and Finance announced a ‘market sentiment stabilization’ strategy in response to the ‘R fear’ (economic recession) originating in the US, under Vice Minister Yoon In-dae. The Ministry of Strategy and Finance assessed that the global stock market, including our stock market, showed an overall adjustment as the US stock market fell sharply in the latter half of last week due to concerns about an economic slowdown in the US, deteriorating performance of major companies, and profit taking following a recent rise in stock prices, and announced a plan for the government and the Bank of Korea to maintain a joint 24-hour monitoring system for domestic and international financial markets by related organizations. On the 5th, when the stock market plunged and a temporary trading suspension (sidecar) was announced, Vice Prime Minister Choi Sang-mook instructed in an expanded executive meeting that “uncertainties such as geopolitical instability in the Middle East still exist. The volatility of the global financial market has greatly increased due to concerns about an economic slowdown in the US,” and “If necessary, please closely cooperate and respond according to the contingency plan.” The Korean stock market crash was triggered by the collapse of the US dollar’s usual safe-haven preference as rising unemployment in the US has led to a surge in money into Treasury bonds, causing yields to fall sharply, and the US dollar plunged by about 1% last Friday, sending the Japanese yen down 1.0% to 144.99 on Monday, while the euro was trading at $1.0920.
Reuters reported that the Swiss franc was the main beneficiary of the US risk rush, with the dollar nearing a six-month low of 0.8533 francs, in a foreign currency volatility report.
“The change in expected interest rate spreads for the US has been greater than the deterioration in risk appetite,” Jonas Goltermann, chief market economist at Capital Economics, told Reuters. “If the recession narrative really takes hold, I expect things to change. If safe-haven demand becomes the dominant driver in currency markets, I think the dollar will rebound.” In a report responding to the market plunge, Goldman Sachs stated that "we have raised our 12-month recession probability from 10% to 25%, assuming that our outlook is based on the expectation that August job growth will recover," and that "we believe the risk is limited, given the wide range of easing the Fed has."
Goldman Sachs's forecast for the Fed's rate cuts is a 4% point cut in September, November, and December, but it also made a two-sided prediction, saying, "If we are wrong and the August jobs report is as weak as the July report, a 50bp cut in September is possible."
JP Morgan was more pessimistic, suggesting a 50% probability of a US recession. "We expect a 50bp cut at the September meeting and another 50bp in November, as the Fed appears to be effectively behind," economist Michael Feroli told Reuters. "In fact, they could argue for easing between meetings, especially if the data eases further. Fed officials may be concerned about how such a move could be (mis)interpreted."
The Korean stock market plunged more sharply on the 5th as government officials repeatedly announced countermeasures, with the Kospi index plummeting more than 10% during the session, crashing below 2,400, and the Kosdaq falling to the 600 level.
The Korea Exchange suspended trading on the Korea Stock Exchange (KOSPI) for 20 minutes at 2:14:30 p.m. that day, as it plunged more than 8% from the previous day's closing price.