Korea hit by market volatility after Powell’s hawkish speech

South Korea’s financial authorities and brokerages on Monday warned of volatilities stemming from US Federal Reserve Chairman Jerome Powell’s speech at Jackson Hole last week, with the private sector expressing more skepticism towards the associated risks.

Powell on Friday delivered a hawkish remark saying that the rising interest rates will cause “some pain” to the US economy and that the US Fed will use their “tools forcefully” to combat the nation’s high inflation. The stern pledge rattled the global market including Korea’s benchmark stock index Kospi, which closed 2.18 percent lower from the previous session at 2,426.89. The won further weakened against the US dollar, trading at 1,350.50 won against the greenback around 5 p.m., its lowest value in 13 years.

Noting the growing risks, First Vice Finance Minister Bang Ki-sun pledged to “bolster its policy efforts to stabilize the market in case of an excessive herd behavior.”

The nation’s currency and bond markets will be monitored with extra caution as it is “deeply tied to the movements in the US and other major markets,” Bang said at a meeting of related officials from the Ministry of Economy and Finance.

In line with Bang, the head of the nation’s financial watchdog vowed to closely cooperate with the other financial authorities to minimize the risks.

“With the market volatilities expected to remain a long-term risk, we will tighten the monitoring of our market and maintain a close cooperation with the Financial Services Commission, the Ministry of Economy and Finance and the Bank of Korea,” Financial Supervisory Service Gov. Lee Bok-hyun said at a separate meeting of watchdog officials.

But Lee also downplayed the risks, citing Asia’s fourth-largest economy’s “strong” fundamentals and high foreign exchange reserves.

“While external uncertainties are growing, our economy holds a high-level of forex reserves alongside strong fundamentals including a solid external financial soundness and a relatively strong growth,” the FSS chief said.

“We will be able to sufficiently bear the deteriorated external risks considering the improved asset soundness and forex liquidity,” he added.

But the private sector expressed heavier skepticism about market soundness, warning that the current bear market rally was grinding to a halt.

“The anticipations of a possible US rate cut next year are gone with the US Fed reaffirming its monetary tightening,” Korea Investment & Securities analyst Kim Dae-joon said.

“This is likely to result in a slowdown in the bear market rally momentum and a lackluster performance of businesses that are vulnerable in a high interest rate environment. The Korean securities market will first absorb the risks from the fall in the US stock market and the plummeting value of the won is expected to deal another blow to the market.”

(mkjung@heraldcorp.com)