US rate hikes, COVID-19 spike escalate anxiety on KOSPI

U.S. Federal Reserve Chair Jerome Powell holds an online-only news conference from the Fed building in Washington, D.C., Jan. 26. Screenshot from the U.S. Federal Reserve video broadcast via Reuters-Yonhap

By Lee Min-hyung

Korea's stock market will continue to face volatility this week, as investors' anxiety is running rampant, amid the U.S. Federal Reserve's stronger signal for monetary tightening and the sharp increase in COVID-19 infection cases here, analysts said.

The benchmark KOSPI rose for the past two trading days after experiencing a big plunge throughout January. Yet market analysts here advised investors to be wary of additional falls amid widening uncertainties, with the timeline of the Fed's large-scale quantitative tightening approaching fast.

These hawkish signs from the world's largest economy theoretically come as a bane to stock markets in emerging countries, as investors prefer safer assets during a cycle of monetary tightening. The Bank of Korea's (BOK) preemptive set of rate hikes also keeps weakening investor sentiment here. The Korean central bank has raised the key rate three times, to 1.25 percent, in almost half a year.

The main bourse closed with a slight gain of 1.57 percent at 2,750.26, Friday, but local brokerage houses expected the index to fall to as low as 2,600 this week on escalating fears here and abroad.

Hana Financial Investment predicted the KOSPI to fluctuate between 2,690 and 2,790, while NH Investment & Securities set the target band between around 2,600 and 2,780 for this week.

“Even if recent remarks by Federal Reserve Bank of Philadelphia President Patrick Timothy Harker and Federal Reserve Bank of St. Louis President James Bullard alleviated woes over the likelihood of the Fed's aggressive rate hike of 50 basis points by March, market participants are still paying sharp attention to the position of the U.S. monetary authority,” Kim Young-hwan, an analyst at NH Investment & Securities, said.

Another key factor that causes downward pressure on the local stock market is the sharp rise of coronavirus infection cases here due to the spread of the Omicron variant. The number of daily new infection cases set a record high of 36,362 here on Saturday, according to data from the Korea Disease Control and Prevention Agency. This figure is an increase of around 9,000 from a day earlier.

Coupled with the COVID-19 uncertainty, the BOK is also widely expected to take the same path as the Fed, pushing for a couple of additional rate hikes throughout 2022. Global investment banks expect the BOK to increase the benchmark rate twice by the end of this year.

Goldman Sachs said in a recent report that the Korean central bank will likely raise the key rate to 1.75 percent this year on growing inflationary fears, and that the figure could rise as high as 2 percent by early next year.

JPMorgan also warned of faster and more aggressive rate hikes by the BOK this year. It expected the BOK to increase the key rate by 25 basis points in April and again sometime in the third quarter of this year.