KOSPI Drops on Surging US Treasury Yields: 3 Causes of the Stock Market Plunge and FOMC Outlook

Core Summary: Recently, the US 30-year Treasury yield hit a multi-year high, putting strong downward pressure on stock market valuations. Combined with escalating geopolitical risks from the potential collapse of US-Iran negotiations, massive institutional selling emerged, causing the KOSPI index to close sharply lower. Investors are now focused on the upcoming release of the Fed's FOMC minutes to gauge the path of interest rate cuts.

Surging Long-Term US Treasury Yields and Valuation Pressure

The recent spike in the 30-year US Treasury yield to a multi-year high is shaking global financial markets. Surging bond yields directly hit the stock market, especially tech and growth stocks with high valuations. As the discount rate for future earnings rises, the attractiveness of stocks declines, triggering a reverse money move where funds shift to relatively safer bonds offering higher interest returns. Consequently, the domestic stock market is also leading a downward trend due to fatigue from consecutive gains and a massive sell-off to realize profits.

Escalating Middle East Risks and Preference for Safe Assets

News of the expiration of the US-Iran ceasefire negotiation deadline has once again pushed tensions in the Middle East to a peak. Growing instability in the Strait of Hormuz is driving up international oil prices, including Brent crude, which directly leads to concerns about prolonged global inflation. Negative public sentiment regarding rising gas prices and inflation is rapidly spreading in online communities. Among investors, risk aversion has grown, and a strong preference for safe assets like cash, dollars, and gold has exacerbated the KOSPI's decline.

Timing for Market Rebound and Key FOMC Minutes Takeaways

With the stock market's continued decline, both retail investors in US and domestic stocks are expressing concerns about portfolio losses. The market's attention is now firmly fixed on the soon-to-be-released Fed FOMC minutes and earnings reports from major retail companies. If the FOMC minutes provide clear signals regarding future interest rate cuts or positive assessments on inflation control, the current wait-and-see sentiment may partially recover, offering a clue for a market rebound.

Frequently Asked Questions (FAQ)

• Q. Why does the rise in US Treasury yields cause a drop in the Korean stock market?
  A. When US Treasury yields rise, global funds move to the US bond market, which becomes relatively safer and offers higher returns. This leads to an outflow of foreign capital from emerging markets like Korea, causing sharper declines, particularly in tech stocks burdened by high valuations.
• Q. When is a KOSPI rebound possible?
  A. In the short term, easing Middle East risks and stabilizing international oil prices are necessary. Furthermore, full recovery of investor sentiment can be expected only when uncertainties regarding interest rate cuts and policy direction are resolved through the release of the Fed's FOMC minutes.