Jackson Hole, Strong Dollar Ahead of FOMC... KOSPI Uncertainty Expands (Comprehensive)

Growing Downward Pressure from Strong Dollar
Energy Crisis Intensifies Amid German Inflation
China's Economic Slowdown Also Highlights Negative Factors

[Asia Economy Reporters Ji Yeon-jin and Lee Min-ji] As concerns about the Federal Reserve's (Fed) tightening grow, uncertainty in the domestic stock market is expanding ahead of the Jackson Hole meeting and the Bank of Korea's Monetary Policy Committee (MPC) meeting. In particular, the won-dollar exchange rate, which surpassed its previous high last week, surged to its highest level in 13 years and 4 months on this day, contributing to pulling down the KOSPI.

According to the Korea Exchange on the 22nd, at 9:50 a.m., the KOSPI index was trading at 2,463.59, down 1.17% from the previous trading day. This is a 7% drop compared to this month's high of 2,533.52 (on the 16th). The KOSPI attempted to settle above the 2,500 mark after a 10% surge from 2,305.42 on the 1st of last month, but following the release of the July Federal Open Market Committee (FOMC) minutes, concerns over tightening intensified, causing it to fall below 2,500.

The strong dollar trend is increasing downward pressure on the KOSPI. The dollar's value rose amid growing concerns over a global economic recession. In the Seoul foreign exchange market on this day, the won-dollar exchange rate opened at 1,335.5 won, up 9.6 won from the previous closing price of 1,325.9 won. This is the first time this year the exchange rate has risen into the 1,330 won range, surpassing the previous high of 1,326.70 won recorded on the 15th of last month. This level is also the highest in 13 years and 4 months since April 29, 2009 (1,357.5 won).

This was driven by the inflation data released over the past weekend in Germany, which heightened fears of an energy crisis in Europe. Germany, the largest economy in Europe, saw its producer price index (PPI) rise 5.3% month-on-month in July, fueling inflation concerns. The global stock markets, including South Korea's, had rebounded together since last month as international oil prices, which had soared earlier this year, declined, reflecting expectations that inflation had peaked. However, with winter approaching and heating demand concentrated, international oil prices are expected to rise again.

Additionally, China is facing increased COVID-19 cases and manufacturing data that fell far below market expectations, strengthening forecasts of an economic recession. The strong dollar inevitably leads to reduced trade volume and won depreciation, with the market predicting the won-dollar exchange rate could surge to 1,350 won.

Typically, foreigners sell domestic stocks and buy dollars amid a strong dollar to secure foreign exchange gains. Foreign investors have been net buyers of stocks worth over 4.3 trillion won from last month through the 19th. However, if the dollar continues to strengthen, there is a possibility that foreign investors, who hold the key to the domestic stock market, may start selling.

Kim Dae-jun, a researcher at Korea Investment & Securities, said, "The supply and demand environment may be unfavorable for the Korean stock market, and the biggest concern is the trading stance of foreign investors." He added, "If the dollar strengthens and the won-dollar exchange rate rises, the Korean stock market may not be an attractive investment destination from the perspective of foreign investors." Kim Jang-yeol, head of the Sangsangin Securities Center, said, "If the Fed implies at the Jackson Hole meeting that it wants the strong dollar to continue for the time being, the stock market will confirm the end of the summer rally."

Meanwhile, at the MPC meeting scheduled for the 25th, the Bank of Korea is expected to end the big step rate hikes and raise the interest rate by 25 basis points (1bp = 0.01 percentage points) reflecting concerns over an economic recession.

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