Won and stocks fall as a soft landing looks less likely by the day

Korean stocks dropped Tuesday as the global selloff continued and ahead of what is expected to be a big rate increase by the central bank Wednesday.

Electronic display boards at Hana Bank in central Seoul show stock and foreign exchange markets Tuesday. [NEWS1]

Korean stocks dropped Tuesday as the global sell-off continued and ahead of what is expected to be a big rate increase by the central bank Wednesday.

The Kospi fell as much as 2.63 percent, to close down 1.83 percent, as institutional investors sold heavily, while the Kosdaq Composite Index declined 4.15 percent.

Shares of Samsung Electronics, Korea's largest company, closed down 1.42 percent and SK hynix 1.10 percent.

The won retreated as well, losing 1.82 percent of its value against the dollar, hitting 1,438.10 during the day.

So far this year, the Kospi is down almost 27 percent and the Kosdaq is down more than 35 percent. The won is down about 20 percent.

Financial markets globally have been rocked day after day as investors begin to accept the reality of a U.S. Federal Reserve that will continue its relentless fight against inflation despite the possibility of recession.

On Friday, U.S. shares plummeted, with the Nasdaq Composite falling 3.8% and the S&P 500 down 2.8 percent. Tech shares were hit particularly hard on indications that the chip slump could be especially brutal. Shares in the U.S. continued to decline on Monday, with the Nasdaq hitting a 2-year low. Korean markets were closed Monday.

On Wednesday, the Bank of Korea’s Monetary Policy Board will meet and announce its decision on rates.

It is in a tough position.

The bank cannot raise rates too much or too quickly as the property market is teetering and Koreans are strapped. Around 380,000 households in the country are at high risk of financial default due to excessive debt as of the end of last year, according to central bank data released Monday.

The bank is also under pressure not to be too dovish, as it risks falling too far behind the U.S. federal funds rate, which is in the range of 3.00 percent to 3.25 percent. Korea's base rate is 2.50 percent.

Higher rates in the United States tend to attract money from countries where rates are lower.

Expectations are for the central bank to increase rates by half a point, which has become known as a 'big step' in Korea, to 3.00 percent.

The board is “likely to take a ‘big step’ in October and November, and the upping cycle is projected to continue through the first quarter of next year,” wrote Kong Dong-rak, an economist at Daishin Securities in a report Monday. He added the rate is projected to stand at 3.75 percent at the end of the first quarter.

In a poll conducted by Reuters Oct. 4 through Oct. 6, 23 of 26 economists said they are anticipating a 50 basis point increase on Wednesday.

Kim Sung-soo, an analyst at Hanwha Investment & Securities, said the U.S. September jobs report may have contributed to the decline of share prices.

“The U.S. registered a moderate September job report, which gives more room for the Fed to further pull up the federal funds rate to tame inflation,” said Kim. “The terminal rate for Bank of Korea’s base interest rate is 4 percent at the end of the first half next year."

The terminal rate is where the benchmark interest rate will come to rest before the central bank starts trimming it back.

BY JIN MIN-JI [jin.minji@joongang.co.kr]