Jackson Hole D-1 "Tapering Shock 8 Years Ago Unlikely This Time... Rather an Investment Opportunity"

Global Funding Squeeze Turning Point, Jackson Hole D-1

Ben Bernanke's Sudden Tapering Announcement 8 Years Ago

Market Shock Trauma Experienced

Growing Interest in Tomorrow's Jackson Hole Meeting

Financial Investment Industry and Investors

"This Time, No Fear of Tightening Shock"

U.S. Has Sufficiently Communicated with the Market Regarding Tapering

Interest Rates Abnormally Low Due to COVID-19

Following Stock Market Learning Effects

Some See Additional Buying Opportunities at Lower Prices

[Asia Economy Reporter Kim Eunbyeol] The atmosphere is cautiously shifting toward a global 'tightening of money supply.' Following the Bank of Korea's increase of the base interest rate from 0.50% to 0.75% per annum to curb soaring housing prices and household debt, there are forecasts that the U.S. will begin tapering (reducing asset purchases) as early as this year. Norway plans to raise its base interest rate in September, New Zealand, which stopped new asset purchases in July, is expected to raise its base rate by the end of this year, and Australia is scheduled to start tapering from October. Yield-sensitive investors are preparing to respond quickly by examining how financial markets moved during past transitions to tightening.

What Happened During the 2013 U.S. Tapering Precedent?

The turning point in global capital flows is the timing of U.S. tapering. On the 27th (local time), the Federal Reserve Bank of Kansas City will hold a virtual Jackson Hole meeting inviting central bank governors and economic experts from major countries, with the biggest focus on whether Jerome Powell, Chair of the U.S. Federal Reserve (Fed), will make remarks related to tapering. This is because there is trauma from the market shock when then-Fed Chair Ben Bernanke suddenly announced tapering in May 2013.

At that time, when Chair Bernanke mentioned tapering, massive capital outflows occurred in emerging markets, causing stock prices to plummet. The Korean KOSPI index fell 8.5% from around 2001.05 at the end of May 2013 to the 1800 level within about a month. The U.S. had been supplying dollars to the market by purchasing government bonds to stimulate the economy, but reducing this naturally decreased liquidity supply, leading emerging markets to withdraw funds first. The KOSPI index recovered to the 2000 level after tapering ended in October 2014 but fell back to the 1800 level when the Fed raised the base interest rate for the first time in over nine years in December 2015.

As the U.S. withdrew dollars, the dollar's value rose. The Dollar Index (which measures the value of the U.S. dollar against six major currencies) rose from about 82.45 on June 1, 2013, to 102.42 by the end of 2016. The Korean won depreciated against the dollar, causing the won-dollar exchange rate to rise. When the Fed announced it would buy fewer government bonds, U.S. Treasury prices plummeted (bond yields rose). The 10-year U.S. Treasury yield, which was around 2% in early May 2013, jumped close to 3% by the end of that year. If tapering is implemented faster than market expectations this time or if tightening moves in various countries are stronger than expected, it can be predicted that the places most affected will be emerging economies like Korea with open economies.

Jerome Powell, Chairman of the U.S. Federal Reserve (Fed)
[Photo by Reuters]

Investors Say "This Time Is Different"... Portfolio Reorganization Underway

The heightened attention to U.S. tapering is not unrelated to past trauma. However, the financial investment industry and investors believe there will be no 'taper tantrum' this time. First, the pace of U.S. tapering is not fast, and the Fed appears to be communicating sufficiently with the market. Chair Powell seems to be refraining from mentioning tapering as much as possible, conscious of the 2013 incident. As the COVID-19 Delta variant spreads in the U.S. and signs of economic recovery slowing emerge, the atmosphere is to further avoid tapering mentions. Having gone through this process, the market is sufficiently mentally prepared, so a tantrum like in the past is unlikely. Second, interest rates are abnormally low due to the COVID-19 pandemic.

Kim Hyunseop, team leader of the WM Star Advisory Group at KB Kookmin Bank, said, "Although fixed deposit interest rates have been gradually rising compared to the past, the situation is nowhere near satisfying customers' expectations." He added, "Although the stock market has fallen significantly recently, interest remains high, and some people see the price drop as an additional investment opportunity due to learning effects." However, uncertainty has increased, and since the dollar tends to strengthen whenever global financial markets shake, there is also a movement to buy in installments whenever the dollar falls. Kim said, "It seems the consensus is forming that including the dollar in portfolios is appropriate," adding, "Interest in the dollar continues to persist."

Song Jaewon, team leader at Shinhan Bank PWM Seocho Center, said that since U.S. tapering could have a more immediate impact on stock prices than Korea's interest rate hikes, he is closely watching the Jackson Hole meeting and the stock market trends from 2013 to 2014. Song explained, "We are seeing investors shift from investing in individual U.S. stocks to exchange-traded funds (ETFs)." ETFs in defensive U.S. sectors such as healthcare, consumer staples, and utilities, which gain popularity during high market volatility, saw net inflows of $5 billion (about 5.8 trillion KRW) last month.

In this situation, the situation in Afghanistan is attracting attention as a variable in financial markets for the time being. On the previous day, the Dow Jones Industrial Average closed at 35,213.12, down 192.38 points (0.54%) from the previous session, and the S&P 500 index fell 26.19 points (0.58%) to 4,470. As of 10:14 a.m., the KOSPI index was trading at 3,112.56, down 15.97 points (0.51%). The won-dollar exchange rate opened 0.5 won higher at 1,171.0 won and has been moving in the 1,172?1,173 won range.

Lee Ju-yeol, Governor of the Bank of Korea, is striking the gavel at the Monetary Policy Committee meeting held at the Bank of Korea in Jung-gu, Seoul, on the morning of the 26th. The Bank of Korea raised the base interest rate from 0.50% to 0.75% on the 26th. [Photo by Yonhap News]

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