Will Rising Interest Rates Cause 'Jisu Defense Shield' Donghak Ants to Hesitate?

KOSPI Declines for Second Day After Rebound
Attention on Upcoming US Jackson Hole Meeting
Limited Impact Expected from Interest Rate Hike

[Asia Economy Reporter Song Hwajeong] With the base interest rate raised for the first time in 15 months, the stock market is also being affected. The KOSPI, which had recently started to rebound, has shown a decline for two consecutive days. In particular, the impact of the interest rate hike is expected to affect individual investors who have been defending the index. With the upcoming U.S. Jackson Hole meeting, attention is focused on the direction of stock prices next week.

As of 9:15 a.m. on the 27th, the KOSPI stood at 3,121.43, down 7.10 points (0.23%) from the previous day. The KOSPI, which had rebounded with three consecutive days of gains as foreign selling pressure eased, started the day higher but turned downward due to the impact of the interest rate hike, closing in a weak trend. A slight weakness continued on this day as well.

Although the effects of the interest rate hike are appearing, the market expects the impact to be limited. Kim Yonggu, a researcher at Samsung Securities, said, "The changes in the Bank of Korea's base interest rate and the KOSPI price path generally move together because the base rate hikes followed a period of global economic recovery and increased corporate profits," adding, "As long as the cyclical recovery of the global economy and the virtuous cycle of domestic corporate earnings fundamentals remain valid, this interest rate hike is unlikely to cause an immediate change in the domestic stock market's trajectory."

The impact of the interest rate hike on the overall liquidity environment is also expected to be limited to a neutral level. Researcher Kim explained, "Despite the base rate hike, the negative real interest rate environment continues, and with the Korea-U.S. policy rate gap expanding to around 50 basis points, it is possible to curb further rises in the won-dollar exchange rate," adding, "This is because the internal credit spread's downward trend continues based on the cyclical recovery of the domestic and international macro environment."

However, individual investors are expected to face negative effects as the burden of margin trading increases due to the interest rate hike. According to Samsung Securities, the current interest cost burden on individual and household margin trading stands at a record high of 1.8 trillion won. Researcher Kim said, "In an environment where new and additional borrowing restrictions accompany rising interest rates, a contraction in margin trading is inevitable," emphasizing, "This is why special caution is needed for the top margin trading stocks." He added, "If domestic and international economic slowdown and financial tightening lead to a reversal in the internal credit spread's rise, the money movement phenomenon in individual and household stock markets could be limited to a fleeting breeze." According to the Korea Financial Investment Association, the margin loan balance, which is the amount individual investors borrow from securities firms to invest in stocks, was 24.4541 trillion won as of the 25th. It recently surpassed 25 trillion won, reaching an all-time high, but fell back to the 24 trillion won level as securities firms temporarily suspended securities-backed loans due to the exhaustion of margin lending limits. The margin loan balance was less than 10 trillion won at the beginning of last year but surged to a record high of 25 trillion won this year due to a rapid increase in leveraged investing after COVID-19.

Following the interest rate hike, the U.S. Jackson Hole meeting is scheduled, and the market remains cautious. At 11 p.m. on the same day, Federal Reserve Chairman Jerome Powell is scheduled to deliver the keynote speech at the Jackson Hole meeting. Initially, it was expected that specific plans for tapering (asset purchase reduction) would be mentioned at this Jackson Hole meeting, but due to the spread of the Delta variant, the timing of tapering is anticipated to be delayed. Kim Younghwan, a researcher at NH Investment & Securities, said, "This Jackson Hole meeting is held virtually, which indicates that COVID-19 still affects economic activities and that the Fed is also influenced," adding, "I believe it is unlikely that the Fed will formalize tapering before confirming the impact of the Delta variant spread on the labor market."

Moon Namjung, a researcher at Daishin Securities, said, "At this point ahead of September, the conclusion of the Jackson Hole meeting will bring calm to the stock market in terms of resolving uncertainty, regardless of the message content it delivers," adding, "Also, the August employment data to be released on the 3rd of next month is expected to play a role in changing the overly hawkish monetary policy tone that was concentrated in August, which could provide a pretext for delaying tapering and positively affect investor sentiment."

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