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Kospi collapses and won slides to its 2009 level

Foreigners dump shares and both exchanges are halted
Mar 20,2020
A dealer walks past an electronic signboard in the dealing room of KB Kookmin Bank in Yeouido, western Seoul, Thursday. The Kospi closed at 1,457.64, a 133.56 point drop from the previous close. The local currency closed at 1,285.7 won, up by 40 won. [YONHAP]
As investors scrambled for U.S. dollars amid fears that nothing is safe - not even the usual safe haven of treasury bonds - Korea’s main bourse collapsed Thursday led by a sharp drop in the value of the local currency and a sell-off by foreign investors.

Korea’s benchmark Kospi closed at 1,457.64 Thursday, down 8.39 percent and under the 1,500 mark for the first time since 2009, in the wake of the global financial meltdown.

The Korean won-dollar exchange closed at 1,285.7 won, up by 40 won Thursday. That was the highest level since June 2009.

The value of the won against the U.S. greenback started off at 1,257 won Thursday morning, but soon skyrocketed to the 1,290-level and stayed there for most of the remaining trading session.

The Kospi started off at 1,626.09, up 2.19 percent from the previous day’s close of 1,591.20, a 10-year low. The index dropped to as low as 1,440 around noon, resulting a total market cap of 984.7 trillion won at one point. It was the first time since 2011 that the Kospi’s market cap fell under 1,000 trillion won.

In an echo of the New York Stock Exchange’s trading halt Wednesday, the Korea Exchange also had to halt trading Thursday both on the Kospi and the tech-heavy Kosdaq markets at 12:05. Less than a week had passed since both markets saw suspended trading simultaneously for the first time in history last Friday.

In between Friday and yesterday, the Korean government had announced a slew of measures to cushion the economic fallout of the coronavirus crisis, including the National Assembly approving a 11.7 trillion won fiscal stimulus and the central bank cutting interest rates by 50 basis points.

A circuit breaker in Korea activates when market volatility exceeds 8 percent for more than one minute. The Kospi temporarily shut down for 20 minutes after it recorded a 8.15 percent drop, being traded at 1591.20. The Kosdaq was suspended after it posted an 8.31 percent drop to 444.81 from the previous day’s 485.14.

The secondary Kosdaq closed Thursday at 428.35, an 11.71 percent drop.

A massive sell-off by foreign investors, fleeing Korea for safer assets, contributed to the sharp fall.

Foreign investors sold a net 618.8 billion won Thursday while retail and institutional investors could not fully make up the deficit. Retail investors net purchased 248.6 billion won worth of shares while institutional investors bought a net 288.1 billion won.

“The volume of foreign investors’ sell-off wasn’t historical today,” said Noh Dong-kil, an analyst at NH Investment & Securities. “But retail investors have run out of ammunition to buy back what foreign investors dumped.”

Retail investors’ daily net purchases peaked at 1 trillion won just a week ago. With a spreading belief that the economy will not recover soon as the pandemic spreads in the West, they are expected to grow more pessimistic.

After posting net purchases of 926.2 billion won Monday, the volume fell to 600 billion and 913 billion won on the following days.

“The Kospi will only settle down when U.S. main indexes get back on track and that will only happen once the fiscal stimulus by the Trump administration passes the Congress,” Noh said. “Without that, the main bourse will only deteriorate further as there’s still room for foreign investors to ditch Korean shares.”

U.S. dollars are in a global shortage as uncertainty crests with the coronavirus pandemic. Reuters’ dollar index, which measures the greenback’s strength against a basket of six other major currencies, rose by 1.69 percent to 101.08 Wednesday, its highest level since April 2017.

Although the Korean won’s value fell by a big margin, it is not the only currency skidding against the greenback. The value of the Japanese yen, another perceived safe-haven currency, was down by 0.4 percent against the U.S. dollar.

“Risks prevail in the market at the moment, and they resemble the beginning of the financial meltdown in 2008,” said Lee Seung-hoon, chief economist at Meritz Securities. “This leads to a sell-off in treasury bonds and gold, expanding demand for U.S. dollar liquidity. In Korea, the trend becomes more obvious through selling of shares by foreign investors.”

Companies on the main bourse continued to bleed. Samsung Electronics shed 5.81 percent to close at 42,950 won. Hyundai Motor, which closed a U.S. factory after one worker tested positive for the Covid-19 virus, experienced a hefty 10.34 percent drop to close at 65,900 won.

Cosmetics companies were safer thanks to news that the pandemic is on an apparent decline in China, their major market. Amorepacific shed a mere 0.31 percent to close at 159,500 won.