Calming the shocks from Black Monday

The government and legislature must unite in legal and policy support for companies and industrial competitiveness during tough times like this.

Asian stock markets, including the Korea Exchange, continued to rock on Monday on fears of a U.S. recession and foam around the artificial intelligence (AI) bonanza, suffering record back-to-back losses. By the end of Monday, a total of more than 235 trillion won ($170.7 billion) in market cap evaporated in Korea.

Kospi plunged to 2441.65, down 8.77 percent from the last trading day. After the benchmark index fell by 8 percent on Monday, the circuit breaker system was activated, and yet the index plummeted under 2400 on the day. As a whopping 192 trillion won vanished just for one day, the market cap of all listed companies in the Seoul bourse went below the threshold of 2,000 trillion won largely due to the sell-off by foreign investors.

Kosdaq also ended 11.3 percent lower at 691.28. A circuit breaker was issued at both the Kospi and Kosdaq markets for the first time since March 19, 2020. Samsung Electronics nosedived 10.3 percent, the biggest one-day fall since the global financial crisis.

Other Asian markets were no better. Japan’s benchmark Nikkei 255 index tumbled by the largest-ever margin to close 12.4 percent lower at 4451.28 and mark the worst day since the “Black Monday” of 1987 after the Plaza Agreement. The loss of points on the index was the largest on record. Taiwan’s weighted index was dragged down 8.35 percent in the largest fall on Monday.

The tables have turned dramatically over a few days, regardless of the likelihood of a U.S. rate cut in September. The markets are hurriedly factoring in a recession scenario from the softening economic data on top of disappointing news from big-tech majors like Nvidia whose new AI chips are expected to be released later than expected due to its design flaws and Intel’s lousy second-quarter results.

A U.S. recession and the ramifications on the global economy and markets can be devastating for the export-reliant Korean economy. The continued stock sell-off by foreign investors can rock the dollar-won exchange and further dampen consumer and corporate spending. Volatility in the financial market is inevitable due to mixed policy directions in major economies, such as the United States mulling lowering the benchmark rate while Japan shifts to a rate hike.

The stumbling growth rate, ballooning household debt and a heated real estate market all negatively impact the economy. Authorities must learn from the controversy about the Fed acting too slowly to lower the benchmark rate and do their utmost through a deliberate policy mix to defend the domestic markets and the economy. The government and legislature must unite in legal and policy support for companies and industrial competitiveness during tough times like this.