The exchange rate also surged, threatening ‘1,470 won’
Financial markets wobbled on inflation fears

On the 3rd, the first domestic trading day after the U.S. airstrike on Iran, the local financial market staggered in an Iran-driven ‘Black Tuesday’. The KOSPI fell more than 7%, marking the largest one-day drop on record. The won-dollar exchange rate, which had recently been trending lower, leapt by more than 26 won to threaten 1,470 won, and government bond yields also jumped, leaving all asset classes weaker. The market largely views this as a temporary shock, but there are concerns that volatility could grow if the Iran situation is prolonged.

That day, the KOSPI plunged 452.22 points (7.24%) from the previous session to close at 5,791.91, surrendering the 5,800 level. The KOSDAQ ended the session at 1,137.70, down 55.08 points (4.62%) from the previous session. Declines that day were the steepest for the KOSPI in 19 months since ‘Black Monday’ on August 5, 2024, and for the KOSDAQ in 11 months since April 7 last year. In terms of absolute point drop, the KOSPI posted its largest ever, while the KOSDAQ recorded the biggest since ‘Black Monday’ in 2024, 19 months ago.

In the domestic stock market alone, more than 407 trillion won in market capitalization evaporated in a single day.

As the KOSPI slumped, a ‘sell sidecar’a five-minute halt of program sellingwas triggered, but foreign investors, on a ‘sell’ streak for nine consecutive sessions, net sold 5.1708 trillion won, pulling the index down.

The KOSDAQ at one point set a year-to-date high (1,215.67) as foreigners net bought 591.5 billion won, but it reversed lower in the afternoon amid worsening Middle East tensions and extended losses. Asian markets were broadly weak, including the Nikkei 225 in Japan (-3.06%) and Taiwan’s TAIEX (-2.2%), but the drop in the domestic market was larger.

In the Seoul foreign exchange market, the won-dollar rate closed up 26.4 won from the previous session at 1,466.1 won per dollar. The daily rise was the largest since April 7 last year (33.7 won). The depreciation against the dollar was 1.8%, the sharpest among major Asian currencies. Typically, when geopolitical risk intensifies, bonds as a safe asset strengthen, but the 10-year government bond yield ended at 3.594% per annum, up 0.148 percentage point from the previous session, indicating weakness (lower bond prices).

Global financial markets were shaken as the Middle East situation continued to worsen and concerns mounted that a surge in energy prices could trigger cost-push inflation. As a result, expectations for U.S. policy rate cuts weakened, government bonds in the United States and other major countries declined, and safe havens such as the dollar and gold strengthened.

The domestic financial market in particular showed greater volatility due to factors such as overheating in equities, high dependence on energy imports from the Middle East, and the concentration of shocks after the holidays. Lee Kyung-min, a researcher at Daishin Securities, said, “The KOSPI saw its decline deepen as the unreflected drop from the previous day combined with foreign investors’ profit-taking pressure after the index’s sharp rally.”

However, some overseas investment banks and domestic brokerages expect the volatility to be temporary. Timothy Moe, Goldman Sachs Asia-Pacific equity strategist, told Bloomberg, “From a strategic perspective, the underlying fundamentals in Asia remain very positive, so (the Middle East situation) could instead be taken as an opportunity.”