Fear of Being Crushed by 'Giant Step'... Stock and Bond Markets Hold Their Breath

June FOCM Results One Day Before
"Fed 90% Chance of 75bp Hike in June"
KOSPI Continues Decline
KOSPI Market Cap Falls Below 2,000 Trillion
Samsung Electronics Hits New Low
Previous Day Treasury Bonds Reach All-Time Highs
Exchange Rate Rises to 1,290 Won Intraday

[Asia Economy Reporter Hwang Yoon-joo] On the eve of the June Federal Open Market Committee (FOMC) regular meeting, the aggressive tightening by the U.S. Federal Reserve (Fed) has become virtually inevitable, causing tension in the domestic stock and bond markets. As the pace of U.S. interest rate hikes accelerates, the possibility of an interest rate inversion between South Korea and the U.S. has emerged, and a volatile market is expected to continue for the time being.

On the 15th, the KOSPI opened at 2,490.01, down 2.96 points (0.12%) from the previous day, but the decline widened as time passed. After 10 a.m., the drop expanded to the 30-point range. Foreigners and institutions are net selling 273.3 billion KRW and 35.7 billion KRW, respectively. Samsung Electronics, the market leader, also fell further, dropping below 61,000 KRW and hitting a new low from the start of trading.

[Image source=Yonhap News]

This reflects the domestic stock market’s cautious sentiment toward the ‘Giant Step’ (a 0.75 percentage point hike in the base interest rate at once). The market already sees a 90%+ chance of a 0.75 percentage point rate hike at the June FOMC and an 88% chance of the same in July.

This is because the U.S. Consumer Price Index (CPI) in May rose 8.6% year-on-year, marking the highest increase in over 41 years since December 1981. Expectations that inflation had peaked have collapsed, making the Fed’s aggressive tightening a foregone conclusion.

Han Ji-young, a researcher at Kiwoom Securities, said, "Considering that the U.S. 10-year Treasury yield surged to just below 3.5% intraday the previous day, market participants currently seem to be pricing in the Fed’s aggressive rate hikes to address prolonged inflation issues, regardless of whether inflation has peaked." She added, "(The KOSPI market) is showing strong caution toward the FOMC from the start of trading."

Reflecting this, the KOSPI has fallen below the 2,500 level since the CPI announcement on the 10th and is moving below the lower bound of the index band predicted by securities firms. The KOSPI’s market capitalization also fell below 2,000 trillion KRW on the 13th, dropping to 1,972 trillion KRW.

The bond market atmosphere is even heavier. The previous day, government bonds of all maturities closed at new highs. The 3-year bond, which is most sensitive to the base interest rate, closed at 3.548%, up 3.4 basis points from the previous day, marking the highest level in 10 years. The 10-year and 5-year bonds also reached new highs at 3.691% and 3.703%, respectively. The 2-year bond closed at 3.425%, marking new highs for three consecutive trading days.

Lee Han-gu, a bond specialist at the Korea Financial Investment Association, explained, "Concerns that U.S. inflation will be difficult to control have led to expectations that the Fed will raise rates quickly and strongly until September." He added, "In this situation, the Bank of Korea’s statement on simple government bond purchases had little effect." He continued, "The biggest issue now is how quickly inflation can be tamed. The pace of U.S. tightening also affects the pace of South Korea’s base interest rate, so it has a significant impact on the domestic bond and stock markets."

The won-dollar exchange rate is also flashing warning signals. On this day, the exchange rate opened at 1,289.0 won, up 2.6 won. The previous day, the won-dollar rate opened at 1,291.5 won, up 7.5 won, and rose to a high of 1,292.5 won. It then surpassed the intraday high of 1,291.5 won recorded on May 12. If the won continues to weaken, foreign capital may withdraw due to concerns over exchange losses.

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