Despite Trump's COVID-19 Diagnosis, Korean Stock Market Rises... "Fundamental Market, Increased Volatility"

KOSPI Starts Higher Right After Chuseok Holiday
Despite Trump’s COVID-19 Diagnosis and US Election Issues
'Risk-On' Sentiment Remains
USD-KRW Exchange Rate Also Falls

Volatility Expansion Inevitable for Now
Likely to Move Depending on US Election Outcome

[Asia Economy Reporter Kim Eunbyeol] With the U.S. presidential election just a month away and news of President Donald Trump's COVID-19 diagnosis, uncertainty in the domestic financial market has intensified. Experts point out that the recent unusual volatility index movements and the inability to accurately predict President Trump's health status and the direction of the U.S. election are key points to be cautious about. There is also analysis suggesting that the market is transitioning from a 'liquidity-driven phase' to a 'fundamental-driven phase,' where markets show strength based on country and corporate fundamentals.

Market Holds Steady... Starts Strong Despite Concerns

On the 5th, despite forecasts that the market might fluctuate due to the KOSPI index showing a correction just before the Chuseok holiday and overlapping U.S. issues, the market is surprisingly holding firm. As of 10:23 a.m., the KOSPI index was trading at 2,352.61, up 1.08% (25.24 points) from the previous trading day. Institutions and foreign investors are leading the index's rise with net buying. The KOSDAQ index is also trading up 0.44% (3.76 points) at 851.91. The won-dollar exchange rate also started lower. In the Seoul foreign exchange market, the won-dollar rate began trading at 1,166.5 won, down 3.0 won.

On October 2nd (local time), the U.S. stock market wavered after President Trump tested positive for COVID-19, but a rebound buying spree just before the close reduced losses, which seems to have positively influenced our market as well. The White House repeatedly stated that President Trump's COVID-19 symptoms are mild, and optimism regarding new U.S. fiscal stimulus measures has also fueled risk asset preference.

In the past, when political uncertainty increased, such as when President John F. Kennedy was assassinated or President Ronald Reagan was shot, market shocks were short-lived. On November 22, 1963, the day President Kennedy was assassinated, the U.S. stock market experienced a one-day shock (-2.8%) before quickly resuming an upward trend. A similar pattern occurred on March 30, 1981, when President Ronald Reagan survived an assassination attempt.

President Donald Trump of the United States
[Photo by AFP Yonhap News]

Volatility Expansion Inevitable for Now

Experts believe that although the market has stabilized for the time being, volatility is expected to increase. The 'KOSPI200 Volatility Index (VKOSPI),' known as the Korean version of the fear index, was at 25.41 as of 9:20 a.m., up 5.18% (1.25 points) from the previous day. It had risen to as high as 27.21 on the 24th of last month. The Chicago Board Options Exchange (CBOE) VIX index also rose close to 30 after news of President Trump's COVID-19 diagnosis.

Lee Kyungmin, a researcher at Daishin Securities, said, "Although the probability is low, the market may partially reflect anxiety about the worst-case scenario related to President Trump's COVID-19 diagnosis." He added, "Fluctuations in approval ratings between President Trump and Democratic presidential candidate Joe Biden could lead to portfolio adjustments due to contrasting policies and increased volatility across sectors and individual stocks."

The important question is whether the market can continue its upward trend after going through a volatile phase. Experts predict that fundamentals will drive market trends after the U.S. election. Currently, the KOSPI's 12-month forward price-to-earnings ratio (PER) is about 13 times, near an all-time high, making the speed of economic recovery and corporate earnings crucial. Kim Jungwon, chief strategist at Hyundai Motor Securities, stated, "Although the news of President Trump's diagnosis at the end of the holiday will inevitably increase global financial market uncertainty in the short term, the recent rebound trend in global stock markets is still considered valid." He cited favorable economic indicators from Korea and the U.S. released during the holiday and the possibility of an additional U.S. stimulus agreement as positive factors.

[Image source=Reuters Yonhap News]

Will Dollar Weakness Continue if Trump Wins?

It is also interesting that the dollar weakness continues despite various uncertainties. Since the spread of COVID-19, risk asset preference has increased based on the money pumped into economies worldwide, and the uncertainty originating in the U.S. has not led to a flight to safe assets.

Experts believe that if President Trump wins re-election, the Federal Open Market Committee (FOMC) is likely to continue its accommodative monetary policy. This is because President Trump has consistently urged the Federal Reserve (Fed) to stimulate the economy through a weaker dollar. The fact that Fed Chair Jerome Powell has delayed a clear response regarding quantitative easing expansion ahead of the U.S. election is also for this reason.

Some view that President Trump's COVID-19 diagnosis may actually boost his approval ratings, which in turn supports continued dollar weakness. When the dollar weakens, the Korean won tends to strengthen relatively. Since last month, the won has appreciated alongside the yuan, which has shown strong correlation and strength.

This content was produced with the assistance of AI translation services.