KOSPI falls back to 6,500 as oil and government bond yields fuel concern over high rates

The KOSPI fell back below the 6,600 level as surging oil prices and bond yields hit global financial markets, reviving concern that high interest rates will persist.

South Korea’s benchmark index closed at 6,562.72 on the 2nd, down 3.99% from the previous session and its lowest level in about two weeks. Of 915 listed shares on the main bourse, 735 declined. Japan’s Nikkei 225 fell 2.85% and Taiwan’s weighted index dropped 1.67%, extending the weakness across Asian markets.

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International oil prices rose, reviving inflation concerns and adding upward pressure on major-country government bond yields.

Government bond yields rose simultaneously in the United States, Japan and Europe. Analysts said higher yields made equities less attractive because investors demanded greater returns from risk assets. Renewed tension in the Middle East also pushed oil prices higher, strengthening expectations that inflation and high borrowing costs would pressure stock markets in the second half of the year.

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With Kevin Warsh’s hawkish remarks and concern about US finances overlapping, the rate environment is unlikely to improve easily.

On the 1st, US West Texas Intermediate futures for October delivery rose 5.2% to $90.22 a barrel. Brent futures for November delivery gained 4.6% to $94.65. Lee Kyung-min of Daishin Securities said the rise in oil prices had revived inflation concerns and added upward pressure on major-country bond yields. Kim Seong-geun of Mirae Asset Securities said hawkish remarks by Federal Reserve Chair Kevin Warsh and concern about US finances would make it difficult for the interest-rate environment to improve.

Foreign investors sold 1.9 trillion won in equities, while institutions sold 2 trillion won. Park Hyung-joong, an economist at Woori Bank, said simultaneous increases in major developed-market yields could push South Korean rates higher as well and create another source of financial-market instability. He said the sharp rise in share prices seen in the first half, driven by a semiconductor boom, might not return soon and warned that investors should prepare for a longer period of high rates.

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If major developed countries’ rates rise together, South Korean rates will naturally face pressure to rise in tandem, and that itself will be a source of financial-market instability.