Liquidity Party Ending in Sight... Unusual 'Risk Aversion' Phenomenon (Comprehensive)

[Image source=Reuters Yonhap News]

US Fed Signals Start of Asset Purchase Tapering Within the Year

South Korea's Interest Rate Hike Also Imminent... Funds Flowing into Safe-Haven Assets

Foreign Selling in Domestic Market, US Stock Market Also Wobbles

[Asia Economy New York = Correspondents Baek Jong-min, Song Hwa-jung, Kim Eun-byeol] The unprecedented money spree is coming to an end. The US Federal Reserve (Fed) has indicated it will begin tapering (reducing asset purchases) within the year, signaling an end to the liquidity party with possibilities of an early rate hike by the Fed and speculation of an interest rate increase by the Bank of Korea in August. As the unprecedented money printing during the COVID-19 crisis nears its end, investors have already started to move. Money withdrawn from stocks and cryptocurrencies has flowed into relatively safe exchange-traded funds (ETFs), and the US dollar, a representative safe-haven asset, is strengthening.

According to the financial investment industry on the 19th, foreign investors have sold off 28.7354 trillion won in the KOSPI market this year. April was the only month that recorded net buying. Foreigners have net sold 6.2 trillion won in the KOSPI market just this month, and from July, when the fourth wave of COVID-19 began in Korea, until August 18, foreigners sold about 11.3 trillion won in the KOSPI market. Although the daily net selling amount of 2.6 trillion won on the 13th has eased, net selling of around 300 to 400 billion won continues this week.

As a result, the domestic stock market, which was aiming to return to the 3300 level in early August, is now faltering. As of 9:40 a.m. on the day, the KOSPI stood at 3153.02, down 5.91 points (0.19%) from the previous day. During the session, it even fell below the 3150 level. The KOSPI declined for eight consecutive trading days from the 5th to the 17th, rebounded slightly the previous day, but showed weakness again on this day. Due to the recent decline, the KOSPI broke below the 3200 level for the first time in about two months based on closing prices. Kim Byung-yeon, a researcher at NH Investment & Securities, analyzed, "The volatility of the Korean stock market is more excessive compared to other countries."

Fed officials have agreed to start tapering within the year. The minutes of the July Federal Open Market Committee (FOMC) meeting released on the 18th (local time) stated, "Most members judged that it would be appropriate to reduce the pace of asset purchases within this year, as the economy is expected to make substantial further progress broadly as anticipated."

Accordingly, on the New York Stock Exchange that day, the Dow Jones Industrial Average closed down 382.59 points (1.08%) at 34,960.69, the S&P 500 fell 47.81 points (1.07%) to 4,400.27, and the Nasdaq dropped 130.27 points (0.89%) to 14,525.91.

Funds appear to be flowing into safe-haven assets. The Dollar Index, which shows the value of the dollar against six major currencies, rose to the 93 level, marking the highest since April this year. The Korean won showed relative weakness, and the won-dollar exchange rate rose. As of 9:58 a.m., the won-dollar exchange rate was 1,173.0 won per dollar, up 5.0 won from the previous day. The rise in the won-dollar exchange rate is also attributed to the domestic COVID-19 new cases exceeding 2,000 again.

As risk-asset avoidance continues, the Bank of Korea is highly likely to raise interest rates on the 26th. If interest rates rise, risk-asset avoidance could intensify, leading to increased market volatility for the time being. The COVID-19 Delta variant is also a factor increasing investor anxiety. The 10-year US Treasury yield stands at about 1.262%, showing a phenomenon where bond prices rise despite tightening expectations. While supply and demand factors play a role, this is analyzed as a result of concerns over economic uncertainty. Due to economic uncertainty, investors are moving toward safe assets, causing bond yields to fall inversely to prices. International oil prices fell amid ongoing demand concerns due to the spread of the Delta variant despite a decrease in US crude oil inventories last week. On the New York Mercantile Exchange, September West Texas Intermediate (WTI) crude oil closed at $65.46 per barrel, down $1.13 (1.7%) from the previous session, marking the lowest level since mid-May.

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