Global Risks Holding Back KOSPI, Next Focus: Europe

Risk Premium Calculation Results
40% Chance of Global Recession
Up from 70% Last Month
Decline Due to Expectations of US Rate Cuts Next Year

Variable: Europe-Origin Energy Issues

[Asia Economy Reporter Lee Jung-yoon] Will concerns about a European economic recession hold back the domestic stock market? The 'bear market rally' that has continued since last month is showing signs of ending, with the possibility of a global economic recession reflected in the KOSPI estimated at around 40%. However, there are concerns that the risk of recession due to Europe's energy shortage could rise further, highlighting the need for risk management.

According to the Korea Exchange on the 23rd, the KOSPI index opened at 2,449.31, down 13.19 points (0.54%) from the previous day, maintaining a slightly weak trend during the session. Although the decline narrowed compared to the previous day’s drop of over 1% following Russia’s announcement to halt natural gas supplies to Europe, the index has continued to fall for five consecutive trading days. Europe is expected to face increased recessionary pressure in the Eurozone (19 countries using the euro), as severe drought recently disrupted logistics along the Rhine River, leading to a downward revision of Germany’s GDP growth forecast by 0.5 percentage points. This, combined with concerns over a slowdown in the U.S. economy ahead of the Jackson Hole meeting (August 25?27), where the intensity of U.S. monetary tightening will be discussed, is dampening investor sentiment.

IBK Investment & Securities calculated the 'risk premium (discount rate)' reflected in the KOSPI after GDP shocks in major countries such as the U.S., Europe, and China over the past 10 years, finding the global recession probability to be 40%. This figure was derived by comparing the relative strength of the KOSPI risk premium during past economic downturn periods with the current period, interpreting the probability of recession reflected in the KOSPI.

The global recession probability reflected in the KOSPI rose to 70% in early last month amid concerns over a recession caused by the U.S. Federal Reserve’s tightening policy. Since then, it has fallen to 40% due to inflation peaking, a strong labor market, and expectations of a U.S. interest rate cut next year.

However, the possibility of a further increase in the global recession probability due to Europe’s energy issues has been raised. Europe is proactively storing natural gas in preparation for the winter consumption season, causing natural gas prices to rise sharply. As energy prices increase, the Producer Price Index (PPI) is surging; Germany’s July PPI rose 37.2% compared to the same period last year, marking an all-time high. Month-on-month, it increased by 5.3%, also a record high. Natural gas prices have risen by more than 160% year-on-year, and electricity prices have increased by over 120%.

The energy shortage is expected to continue into the second half of this year. The International Energy Agency (IEA) analyzed that even if Europe secures 90% of its storage capacity for natural gas, it will face a shortage in the first quarter of next year if Russia halts supply. Concerns are emerging that Europe’s GDP will sharply decline as a result. Earlier on the 19th, Russian state-owned gas company Gazprom announced it would suspend supply for three days from July 31 to August 2 for maintenance of the Nord Stream 1 pipeline, which supplies natural gas to Germany and other parts of Europe via the Baltic Sea. This sparked fears that gas supply to Europe could be completely cut off, causing natural gas futures prices to surge. In a report, IBK Investment & Securities stated, “If Europe’s energy shortage problem becomes more visible, the KOSPI risk premium is expected to increase, similar to the 2011 Southern European debt crisis. Since the global economic risk currently reflected in the market has temporarily weakened, risk management is deemed necessary.”

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