Big Fluctuations Rock Korean Stock, FX Markets

Bad business news in the United States and Eastern Europe led to the Korean financial market suffering severe fluctuations yesterday.

The won-dollar rate momentarily breached the 1,600 mark, while the benchmark stock index KOSPI flirted with going under the 1,000 level.

Despite plunges in global stock markets, the KOSPI closed slightly up thanks to a slight rise in the won’s value and a buying spree among institutional investors due to government intervention in the foreign exchange market.

The better-than-expected performances of the stock and forex markets, however, were merely spontaneous rallies propped up by state intervention. It remains uncertain at which levels stock prices and the forex rate will strike a balance.

○ State intervention tames rollercoaster ride

The KOSPI fell below 1,000 soon after opening in the wake of the Dow’s plunge of 4.24 percent to under 6,800 points Monday. As the won-dollar rate neared 1,600 in Seoul, investor sentiment nosedived to send the KOSPI to 992 in morning trading.

The mood in the market, however, changed in the afternoon. Stocks started to rebound as institutional investors increasingly looked for bargains, while forex authorities aggressively intervened in the market to prevent the won from falling further.

As a result, the KOSPI closed at 1,025.57, up 6.76 points (0.66 percent) from Monday.

The won opened at 1,590 against the dollar and jumped to 1,594 at one point, but closed at 1,552.40 won, down 17.9 points after currency authorities sold dollars on the market.

The Korean government is estimated to have pumped into the market a combined 1.5 billion dollars over the past two days.

Strategy and Finance Minister Yoon Jeung-hyun said, “If you see the forex rate with anxiety, it looks uneasy, but if you see it confidently, it looks okay.”

“The forex rate follows a trend and will not move just in one direction constantly,” he added, helping to prevent the rate from rising further.

Seo Jeong-gwang, head of investment strategy at LIG Investment & Security, said, “Institutional investors apparently bought domestic stocks, which look undervalued in dollar terms amid a fall in the forex rate, because they had sold massive volumes of stocks earlier this year, and because they had more resources thanks to fund inflow into their equity-type funds.”

○ Potential obstacles abound

Experts, however, said the sole rally by Korean stocks amid the synchronous stock falls not just in the U.S. and Europe but also China (minus 1.05 percent) and Japan (minus 0.69 percent) could end up burdening the Korean market.

They warn of a growing chance that Korean stocks could fall further due to a string of negative developments, including the maturing of foreign-held bonds, the worsening crisis in Eastern Europe, and earnings reports by U.S. financial institutions.

Kang Hyeon-cheol, head of investment strategy at Woori Investment and Securities, said, “If U.S. financial institutions, including Goldman Sachs and JPMorgan, report a worse-than-expected performance when they announce their earnings March 16, chances are high that Korean stocks could fall further.”

Though the won’s fall ended after government intervention, volatility could erupt again at anytime amid lingering fears over lack of foreign liquidity.

Bae Min-geun, a researcher at LG Economic Research Institute, said, “The financial market will continue to fluctuate due to negative signs from the U.S., deteriorating profitability among companies resulting from the deepening recession, and the financial vulnerability of banks.”

mint4a@donga.com chance@donga.com