Financial Markets
Financial markets recovered from the “Bernanke Shock” in about one month. Indicators in stock, bond, and exchange markets that were rattled after Federal Reserve Chairman Ben Bernanke’s remarks on June 20 that Washington would reduce its bond purchases have recovered to previous levels. Since his remarks, Bernanke, however, has repeatedly stated that the reduction may start at the end of this year and that interest rates would be divorced from the reducing of bond purchases. The markets are finally responding to this with lowered volatility.
On July 23, South Korea’s benchmark KOSPI rose 1.27% to 1,904.15 points driven by foreign and institutional buying. This is the first time the KOSPI was above 1,900 since Bernanke’s remarks.
That same day, sectors such as steel and metals, securities, construction and finance, which had been overshadowed by IT and automobiles, finally saw a rise, leading the recovery to the 1,900 mark.
On June 18, the day before Bernanke’s remarks, the KOSPI was at 1,900.62. Yet following the remarks, the KOSPI continued to plunge to a record 1,780.63 on June 25. However, as foreign investments slowly recovered and institutions such as pension funds went on to actively defend the index, rates have been recovering. Foreign investors that had been on a selloff, bought 320.7 billion won on July 23 alone, leading this month’s net buy to 62 billion won. Institutional investors have bought a total of 656.1 billion won, leading the index hike.
“The market started taking Bernanke’s words that a rise of interest rates would be divorced from a reduction of bond purchases and that this may start later this year,” said Ji Gi-ho, head researcher at LIG Investment & Securities. “We should focus on the fact that the recovery in the past month was led by sectors of materials and finance, not by IT and automobiles,” he added.
Although foreign investment is improving, market experts predict that low performance by individual corporations will result in little movement in the index. However, if China puts out an aggressive policy for economic stimulus, the KOSPI could surpass 2,000.
“The KOSPI declined from the 2,000 level, so there’s still room for additional improvement,” said Kim Hak-gyun, director of Investment Strategy at KDB Daewoo Investments. “The index will stay fairly stable and upward movements will depend on the China variable,” he added.
Domestic bond rates that had been on a hike also recovered to stable levels.
According to the Korea Financial Investment Association, Treasury bond (3-yr) yields rose 0.03% from the previous day (July 22) to be traded at 2.88%. The bond market is finally recovering from concerns that a US exit strategy would begin. The Treasury bond (3-yr) yields that were formed around 2.7%~2.8% prior to Bernanke’s remarks hiked sharply to 3.12% at one time, but recovered quickly in July to their previous levels.
Experts predict that volatility in domestic bond markets will continue as there are still uncertainties regarding a US exit strategy. “After Bernanke’s remarks, concerns about a tapering of asset purchases decreased and interest rates declined following the poor performance of housing indicators,” said Park Hyung-min from Shinhan Investment & Securities. “However, as policy uncertainties remain until the tapering of asset purchases actualize, volatility in the US bond market may continue,” he added.
Exchange rates are also recovering. On June 25, exchange rates at one point hiked to 1,161.4 won against the dollar. However, it has since dropped to 1,117.0 won, which is even lower than before the Bernanke Shock. The Japanese yen, which climbed to the 101 level, also fell to 99.36 yen against the dollar. Furthermore, with Shinzo Abe’s victory in the parliamentary elections, the push for a low yen policy is expected to begin.