Hawkish Fed set to widen KOSPI fluctuation

From left are Bank of Korea Governor Lee Ju-yeol and U.S. Fed Chairman Jerome Powell. AP-Yonhap

Preference for riskier assets will reduce after FOMC meeting

By Lee Min-hyung

The benchmark KOSPI is expected to widen the level of fluctuation throughout this week, as the U.S. Federal Reserve is set to leave a stronger market signal for faster tapering during the upcoming Federal Reserve Open Market Committee (FOMC) meeting.

With Fed Chairman Jerome Powell taking a hawkish turn last month amid growing inflationary fears in the world's largest economy, economists predicted the Fed would double the speed of its tapering and finish its bond-buying campaign by the end of next March.

Wall Street analysts said the Fed is inclined to increase its key rate three times in 2022 after ending its tapering, in a move to curb the increasing inflationary pressure. Some were saying investors should be wary of Omicron variant concerns even if inflation has emerged recently as a more critical factor driving the ups and downs of the financial market.

“The local financial market is in the wait-and-see phase and investors should be neither overly optimistic nor pessimistic, as we need to watch closely how serious the spread of the Omicron variant will be down the road,” Hi Investment & Securities analyst Park Sang-hyun said.

But the mainstream view is investors are certainly paying more attention to the Fed's updated position regarding accelerating tapering as that means it could be wrapping up the program by the beginning of March next year.

Powell is set to reiterate the Fed's support on the earlier ending to tapering during the two-day-long FOMC meeting slated to start on Dec. 14, which could come as a downward pressure on Korean stock markets, according to analysts, Sunday.

The KOSPI narrowly defended its symbolic 3,000-point level last week. But ahead of the FOMC meeting, the main bourse will face higher volatility with local brokerage houses expecting the index to fall below 2,940 points depending upon the specifics of tapering to be announced by Powell.

Based on the Fed's guidance on interest rates and its position on the further outlook, investors could flock to safer assets, resulting in a rise of the won-dollar exchange rate which closed last week at 1,182 won per dollar. As the Omicron variant is a cause for concern, investors are highly likely to favor the dollar, escalating the possibility of the exchange rate to continue soaring to around 1,200 won.

“The preference for riskier assets will be reduced on the global financial market if the dot plot chart after the FOMC meeting signals the Fed's more hawkish turn, which will leave open the likelihood for the Fed to push for more than three rate hikes next year,” Kiwoom Securities economist Kim Yu-mi said. Under the scenario, the dollar will gain more ground against the Korean won and other currencies from emerging economies.

“The dollar will continue strengthening its valuation and this will put more burden on emerging markets,” the economist said.

Unsurprisingly and surely, the outcome of the FOMC meeting will also affect the future course of the Bank of Korea's (BOK) monetary policy. The market expected the BOK's monetary policy board to increase the benchmark rate in January to 1.25 percent and do it once more by the end of 2022, but the timeline will be brought forward in line with the Fed's policy shift.

But economists and analysts say the chances of a less hawkish turn by the BOK are subject to change in tandem with the outcome of the upcoming FOMC meeting as both the BOK and the Fed place much more emphasis on inflationary woes than pandemic uncertainties.

The BOK weakened the intensity of its hawkish rhetorical stance recently, saying that it is not the time for the central bank to increase the key rate to a “contractionary level.” The market interpreted remarks from BOK Deputy Governor Park Jong-seok as a signal that the Korean central bank will not push for a series of prompt rate hikes next year. BOK Governor Lee Ju-yeol has repeatedly underscored the need for a rate hike possibly in the first quarter of 2022, citing solid economic recovery, rising prices and widening financial imbalance here.