Triple risks weigh on financial market

By Kang Seung-woo

The local equity market is unlikely to continue its bullish run and hit 2,000 this year, as the economy is facing the triple burden of China tightening its financial policy, renewed fears of a European debt crisis and volatile currency exchange rates.

Market watchers say the stock market is likely to show a gradual upward trend over the long-term on the back of ample liquidity and solid economic fundamentals, but those external risks could shake the market in the short-term.

High expectations of the KOSPI reaching the 2,000 mark are receding, as some say that it has already peaked this year.

The eurozone seems to have relapsed into financial turmoil amid speculation that Ireland may seek a bailout from the European Union (EU), as yields on Irish government bonds have continued to skyrocket.

The yield on 10-year Irish bonds increased by about 2 percentage points to 8.64 percent last week, compared with two weeks ago. Europe suffered similar financial woes in May, when Greece suffered a sovereign-debt crisis.

The G20 Seoul Summit has left a high possibility of exchange rate floating, as the leaders of advanced and emerging countries failed to come up with a detailed and exact solution to the growing issue. The summit, which came to an end Friday, issued a watered-down statement that pledged to refrain from competitive devaluation of currencies and committed countries to move toward a more market-determined exchange rate.

The G20 agreed to allow emerging markets to impose carefully designed control measures to contain massive capital inflows, leaving foreign exchanges volatile, as well. The won gained 19.9 won against the dollar in the wake of the agreement Friday.

China’s tight-money policy has also fuelled fears, as Beijing has raised the reserve requirement ratio for its major banks to contain soaring consumer prices.

The measure came after inflation there was tallied at 4.4 percent in October from a year earlier, outstripping the market’s expectations.

China has been a key player in the recovery of the global economy, so if the cheap-money policy results in raised interest rates as expected, this will weaken the recovery pace of the global economy.

“Negative factors have appeared. They will not hugely overturn the stock market, but they might affect it through the end of this year,” a Seoul-based economist said.

The KOSPI tumbled 53.12 points, or 2.7 percent, on Thursday as foreigners unloaded shares on a November options expiry. Stocks ended down 0.08 percent at 1,913.12 Friday.

“On the day, the KOPSI gained more than 40 points in the morning session and (I think) it means the stock market bounced back from the previous day’s nosedive. However, the late loss was due to other negative factors.”

Local brokerages predict the KOSPI will hit the 2,000 mark in 2011, but topping that level within this year is seen as out of reach.

“If the downward trend from last week continues, it could sink below 1800 points,” another economist said.

ksw@koreatimes.co.kr