High Oil Prices and Interest Rates Pose Risks to South Korea's Economy

Financial markets are experiencing turbulence, with semiconductor stocks on South Korean and US exchanges showing extreme volatility. This instability stems from concerns about the profitability of hyperscalers' massive capital expenditures, fueled by a strong AI investment cycle, and persistent theories about the semiconductor cycle reaching its peak.

Adding to the market's unease, oil prices are surging again due to escalating US-Iran tensions. Brent crude surpassed the psychological $100 per barrel mark on August 23rd, reaching $100.69. This escalation in the Middle East risks intensifying inflationary pressures. While US inflation had shown signs of easing in June, the renewed oil price surge threatens to reignite inflation concerns.

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The escalation of Middle East risk ultimately leads to inflationary pressure.

This inflationary pressure naturally leads to rising interest rates. Although the US Federal Reserve's decision on further rate hikes this year remains uncertain, Treasury yields are already reacting sensitively, with the 10-year US Treasury yield approaching 4.7%, surpassing its peak from May when US-Israel-Iran tensions intensified. Global bond yields, including those in Germany and Japan, are also rising in tandem.

South Korea is not exempt. Following a 0.25 percentage point increase in the base interest rate by the Monetary Policy Board in July, the possibility of further rate hikes, potentially in August, is increasing due to the oil price rebound. This, coupled with Q2 GDP growth exceeding market expectations, strengthens the case for an August rate hike. The current high interest rate environment poses a significant constraint on economic activity and corporate operations. For instance, hyperscaler companies are increasingly relying on large-scale corporate bond issuances to secure funding, a trend expected to continue. Rising market interest rates could amplify profitability concerns for these companies, as seen with Oracle, whose stock has plummeted and whose credit default swap premium has exceeded levels seen during the financial crisis.

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If the high oil price situation continues, the global financial market will undoubtedly be exposed to the risk of four highs (high oil prices, high inflation, high interest rates, high dollar).