Normalization of Monetary Policy, Stagflation, and US Default... Triple Threats to the Global Financial Market

Global Stock Markets Plunge Amid Sharp Rise in US Treasury Yields
Dollar Strength Drives Up USD/KRW Exchange Rate
KOSPI and KOSDAQ Also Decline

[Asia Economy New York=Correspondents Baek Jong-min, Kim Eun-byeol, Lee Min-ji] The normalization of the U.S. Federal Reserve's (Fed) monetary policy, stagflation, and concerns over a U.S. debt default have driven up U.S. Treasury yields, shaking global financial markets.

[Image source=Yonhap News]

On the 28th (local time) at the New York Stock Exchange, the Dow Jones Industrial Average fell 1.6%, the S&P 500 dropped 2.04%, and the Nasdaq plunged 2.83%. The yield on the 10-year U.S. Treasury note surged to 1.56%, marking the highest level since June, causing interest rate-sensitive tech stocks to plummet simultaneously to a near "seizure" level.

That day, the S&P 500 experienced its largest decline since May, and the Nasdaq its biggest drop since March. As market volatility increased, the VIX, known as the fear index, soared 23% vertically.

Asian financial markets also fell into a chain reaction of turmoil. As of 10 a.m. on the 29th, the KOSPI stood at 3,051.21, down 1.51% (46.71 points) from the previous trading day. At the same time, the KOSDAQ index fell 1.45% (14.71 points) to 997.80, dropping below the 1,000 mark for the first time in about a month since the 23rd of last month. The Japanese Nikkei index was also down 1.97% as of 9:45 a.m. that day.

U.S. Treasury yields had fallen to 1.13% in August but rose for four consecutive days after the Fed made tapering (asset purchase reduction) a foregone conclusion within the year. The rise in U.S. Treasury yields also strengthened the value of the dollar.

Korean government bond yields are also rising sharply. As of 10 a.m. that day in the Seoul bond market, the 3-year government bond yield rose 2.1 basis points (1bp=0.01 percentage point) from the previous trading day to about 1.630% per annum. The 10-year yield surpassed 2.2%, reaching 2.290% per annum.

The won-dollar exchange rate hit a new yearly high again during the trading session. In the Seoul foreign exchange market, the won-dollar exchange rate rose for the seventh consecutive trading day, opening at 1,188.0 won, up 3.6 won from the previous day, and was trading at 1,186.22 won as of 9:32 a.m. During the session, it rose to 1,188.50 won, surpassing the yearly high of 1,186.40 won set on the 23rd. This is the highest level since the intraday high of 1,189.30 won on September 11 last year.

A major foreign media outlet commented that concerns over inflation expansion caused by supply chain disruptions and rising raw material prices, along with economic growth slowdown, have been simultaneously reflected, and that the Fed's attempts to normalize monetary policy, including tapering, are shaking the market. The difficulties in raising the debt ceiling and passing a temporary budget in the U.S. Congress are also increasing global financial market instability.

Sammy Ca, Chief Economist at Swiss Bank Lombard Odier, said, "Concerns about stagflation, where high inflation and economic growth slowdown coincide, are widespread in the market."

Economist Lee Jong-woo said, "There is an analysis that the economy next year will perform worse than this year, marking the end of the rise and the beginning of a decline phase," adding, "As countries raise interest rates and liquidity inevitably decreases, considering various economic conditions, we need to closely monitor the timing of a full-scale market correction."

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