The Stock Market Fog Clears... Eyes Focused on 'Foreign Investors' Footsteps'

US Giant Step Implemented
Domestic Stock Market Relief Rally Led by Foreign Buying
Additional Giant Step Concerns
Foreign Capital Outflow Feared if Yield Curve Inverts

[Asia Economy Reporter Ji Yeon-jin] The domestic stock market is showing strength for the first time in a while as the United States finally implemented a 'giant step' by raising the benchmark interest rate by 0.75bp. This is thanks to the Federal Reserve's (Fed) all-out effort to curb high inflation, which has alleviated concerns that "if inflation is not controlled, economic slowdown is inevitable," a worry that had been troubling the market. As uncertainty over 'stagflation,' where inflation and economic slowdown occur simultaneously, dissipates, the domestic stock market has started an 'relief rally' driven by active buying from foreign investors, although it is difficult to guarantee a sustained buying trend.

According to the Korea Exchange on the 16th, the KOSPI opened at 2,481.66, up 34.28 points (1.40%) from the previous day, showing an intraday rise of over 2%. This marks a rebound after seven trading days. The KOSDAQ index, which had fallen below 800 the previous day, quickly recovered to 820 shortly after opening. Foreign investors led the rise by net buying about 100 billion KRW in the two major markets as of 10 a.m. that day. Institutions also supported the market with net purchases worth about 50 billion KRW.

Jerome Powell, Chair of the U.S. Federal Reserve, raised the benchmark interest rate by 75bp early that day and expressed confidence in the economy, calling it an "unusual phenomenon," which reassured investors. Lee Kyung-min, a researcher at Daishin Securities, said, "With the June Federal Open Market Committee (FOMC) meeting as a turning point, it is expected that the anxiety of investors who had anticipated the Fed's stance and the current fundamental situation will calm down," adding, "The KOSPI is expected to develop a retracement process following the recent sharp decline, supported by the 2,400-point level."

However, the Fed's possibility of continuing the giant step next month and raising interest rates by an additional 175bp this year remains a burden on the domestic stock market. In particular, with the U.S. raising the benchmark interest rate by 0.75%p this time, the interest rate gap with South Korea has disappeared. The U.S. is expected to raise the benchmark rate to 3.4% by the end of the year, far exceeding the Bank of Korea's forecast of 2.5% for this year. This implies an inevitable interest rate inversion between Korea and the U.S., raising concerns that foreign capital outflows may accelerate.

Foreign investors have net sold domestic stocks worth 17.6148 trillion KRW since the beginning of this year until the previous day. Especially this month alone, they have sold over 4 trillion KRW worth of stocks. During this period, foreign investors net bought nearly 3 trillion KRW in the over-the-counter bond market, but repaid about 9.4058 trillion KRW in maturing bonds, resulting in a capital outflow of over 6 trillion KRW from the domestic bond market.

There have been three periods of interest rate inversion between Korea and the U.S., and except for June 1999 to March 2001, foreign capital significantly exited the Korean stock market during the other two periods. From August 2005 to August 2007, during the interest rate inversion period, foreign capital outflow exceeded 32 trillion KRW, and between March 2018 and February 2020, foreign investors net sold 14 trillion KRW. Lee Jin-woo, a researcher at Meritz Securities, said, "The essence of the prolonged bear market has been the market's lack of trust in the Fed," adding, "Due to the strong signal to curb inflation, bond yields fell and the dollar weakened, but since market trust has not been fully restored, the cautious atmosphere is expected to continue for the time being." He added, "Since the foreign investor proportion in the spot market is at its lowest level, it is hard to see strong selling pressure ahead, but foreign investor demand may vary depending on corporate earnings."

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