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Fear of 'taper tantrum' likely to weigh on Korean stock market in 2021

U.S. Federal Reserve Chair Jerome Powell testifies before the House Financial Services Committee at a hearing on oversight of the Treasury Department's and Federal Reserve's coronavirus pandemic response on Capitol Hill, Washington, D.C., Sept. 22, 2020. Reuters-Yonhap
U.S. Federal Reserve Chair Jerome Powell testifies before the House Financial Services Committee at a hearing on oversight of the Treasury Department's and Federal Reserve's coronavirus pandemic response on Capitol Hill, Washington, D.C., Sept. 22, 2020. Reuters-Yonhap

By Lee Min-hyung

Fears over a recurrence of the 2013 "taper tantrum" will likely start escalating in 2021, but the Korean stock market should brace for earlier-than-expected tapering ― the gradual reduction in quantitative easing ― from the U.S. Fed, amid rising inflationary pressure, market experts said Tuesday.

The "taper tantrum" posed a short-lived yet huge shock to major emerging markets in 2013 after the Fed shared its plan for tapering, or reducing asset purchases. The "taper tantrum" resulted in a mass capital outflow from the benchmark KOSPI, dropping the index more than 10 percent in less than a month.

Even if the Fed is not in a position to carry out any near-term tapering for the next few months, and takes steps to quell market worries over tapering or inflationary fears, investors have in recent weeks paid keen attention to the possible recurrence of the shock here, amid the recent rapid rise of U.S. Treasury bond yields.

Federal Reserve Chairman Jerome Powell has reiterated his stance that the U.S. central bank does not have any immediate plans to taper the bond-buying stimulus or hike its near-zero key interest rate.

Analysts, however, have said chances remain that the taper tantrum concern could become a reality sometime next year, and the fear may come faster, in line with how fast ongoing inflationary shock worries are escalating here and abroad.

"Starting from the first quarter of 2021, there is an ample chance that fears over a taper tantrum may result in a full-blown financial panic in the local stock market," Hwang Sei-woon, an economist at the Korea Capital Market Institute, said.

"But the stock market remains solid, stable and is not exposed to any worrisome risk factors this year," he said. "A possible tapering-induced shock no later than the end of the year appears unlikely."

From the near-term perspective, the stock market remains more vulnerable to how effective coronavirus vaccines are and whether they can be injected on time nationwide, he said.

The Fed's repeated message to stabilize the country's soaring Treasury bond yields appears to be having a short-term effect, with the Nasdaq closing up 3.01 percent Monday from the previous trading day.

The KOSPI also jumped 30.92 points, or 1.03 percent, to close at 3,043.87 points Tuesday, on a foreign investors' buying spree of Korean stocks. The robust rally in the U.S. also cast a positive impact on the upward momentum of Korea's main stock market.

Hi Investment & Securities analyst, Park Sang-hyun, said that the possibly looming taper tantrum would cast a less significant shock than it did back in 2013, as major Asian emerging markets' economic fundamentals remain stronger.

"The Chinese economy ― which represented the emerging market during the 2013 tantrum shock ― is in the early phase of a strong rebound now, but the country's economic cycle was at its peak during the 2013 crisis," he said.

The major economic factors of emerging markets are resilient enough to overcome the looming challenge of a tantrum, even if they remain vulnerable to minor risks, due to the volatility of the U.S. Treasury bond yields, according to the analyst.



Lee Min-hyung mhlee@koreatimes.co.kr


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