Kospi edges up despite Fed rate hike, but fears of further tightening grow

The Kospi edged higher Thursday even as the US Federal Reserve raised its benchmark interest rate for the first time in about three years and two months, with much of the hike already priced in. Still, the Fed's signal that further increases remain on the table has heightened caution over a renewed tightening cycle.

As of 10 a.m., the Kospi was up 37.44 points, or 0.56 percent, at 6,755.41, paring an earlier gain after opening 61.05 points, or 0.91 percent, higher at 6,779.02.

On the main Kospi market, retail investors posted net purchases of 297.2 billion won ($217 million), while foreign and institutional investors sold a net 504 billion won and 112.1 billion won, respectively, capping the index's upside. Foreign investors have been net sellers for seven consecutive trading sessions.

Samsung Electronics and SK hynix were trading near flat. Bank stocks, including KB Financial Group and Hana Financial Group, rose more than 1 percent, buoyed by the global trend of rising interest rates.

The fact that the Fed hike had been largely priced in is supporting the Kospi's gains. Han Ji-young, a researcher at Kiwoom Securities, said the limited rise in long-term yields was worth noting. "While short-term yields such as the two-year Treasury rose after the September FOMC, the increase in long-term yields such as the 10-year was contained," Han said. "This shows that concerns about Fed tightening and inflation had already been priced into long-term bonds."

Overnight, the Fed raised its policy rate by 25 basis points to a target range of 3.75 to 4.00 percent at its FOMC meeting — its first rate increase since July 2023, roughly three years and two months ago. The decision was unanimous.

The hike itself was in line with market expectations. The concern was that the FOMC came across as more hawkish than anticipated. Both the policy statement and Fed Chair Kevin Warsh's post-meeting press conference signaled the possibility of additional rate increases. "Inflation has been running above target for more than five years," Warsh said. "The plain fact is that inflation has been too high for too long."

Wall Street fell across the board overnight in response to the Fed's hawkish tone. The Dow Jones Industrial Average and the S&P 500 dropped 1.21 percent and 0.45 percent, respectively, on Wednesday (local time), while the NASDAQ slipped 0.01 percent. The yield on the US 10-year Treasury note climbed back above 5 percent.

Brokerages are interpreting the hike as the start of a new tightening cycle and raising their interest rate forecasts in quick succession. With the Fed's tightening stance now confirmed, concerns are growing that the burden of higher rates could persist for some time.

Kim Il-hyuk, a researcher at KB Securities, said the probability implied by federal funds futures markets of a December hike followed by an additional increase in March next year had jumped sharply from 69.3 percent to 81.1 percent. "The outlook has shifted from a temporary one-or-two-hike scenario to what is effectively a resumption of a rate-hike cycle with three or more increases," Kim said.

Meritz Securities raised its year-end federal funds rate forecasts for this year and next year to 4.25 percent and 3.75 percent, from 3.75 percent and 3.25 percent, respectively. It expects one additional hike in December before rate cuts resume in the second half of next year as consumer spending and labor market momentum weaken.

SK Securities also forecast an additional rate hike in December. Won Yu-seung, a researcher at SK Securities, said the conditions that prompted the September hike are unlikely to ease quickly. "Growth momentum and inflationary pressures, along with geopolitical factors, are not going to resolve in the short term," Won said. "AI capital investment looks set to keep accelerating, and it will take at least three months to confirm a sustained downtrend in core inflation."

Both interest rates and the exchange rate are expected to weigh on the domestic stock market. Byeon Jun-ho, a researcher at IBK Investment Securities, said the hawkish FOMC outcome would leave lingering rate-hike concerns in the market. "Given that the won-dollar exchange rate had fallen sharply in recent weeks, the sensitivity to a rebound following the Fed's decision could be significant, and we need to watch closely for any expansion in foreign selling pressure," Byeon said.

Foreign investors have sold a net 10.58 trillion won worth of Kospi-listed shares so far this month, making their flows a key factor in determining the index's direction. The won-dollar exchange rate opened at 1,377 won Thursday and climbed as high as 1,379.5 won in early trading, approaching the 1,380-won level.

Oil prices are another variable. Lee Eun-taek, a researcher at KB Securities, said the hawkish FOMC outcome was a burden for equities, but added that oil prices were the more market-sensitive factor. "Both bonds and equities are moving more in tandem with oil prices than with the interest rate path," Lee said.

Investor sentiment is freezing up as external conditions — including interest rates, the exchange rate and oil prices — deteriorate. According to Korea Exchange, Kospi trading volume on Wednesday came to 15.86 trillion won, the lowest single-day total of the year.

The average daily Kospi trading volume for this month stands at 20.97 trillion won, also the lowest of the year. That is less than half the 50.35 trillion won recorded in June.

Experts agree, however, that the Fed's rate hike will not necessarily translate into a sustained downtrend for the domestic stock market.

Han Ji-young of Kiwoom Securities said history shows that Fed rate hikes alone have rarely triggered a prolonged market decline. "Looking back at Fed policy cycles and equity markets, rate hikes themselves have not often led to a sustained downturn," Han said. "The economic and earnings cycle at the time has tended to have a greater influence on share prices than the direction of monetary policy." Han also noted that the Kospi's full-year operating profit consensus of around 990 trillion won was a source of reassurance.