South Korean Stocks Hit 11-Year Low; Dollar Nears 7-Year High Against Yen
South Korean stocks tumbled to close at an 11-year low Monday as local institutions dumped blue chips and foreign investors yawned at the removal of the foreign stock ownership limit.
The decline continued early today in near-panic selling, brokers said.
In other foreign trading Monday, when U.S. markets were closed in observance of Memorial Day, the dollar soared to near a seven-year high against the Japanese yen, on mounting pessimism about Japan’s economic prospects.
Also, Latin American stock markets weakened on worries about spillover effect from Asia.
The big news was South Korea: The main Kospi stock index plunged 6.8% to 331.90, falling below the 11-year low of 350.68 set in December.
Monday’s close was the lowest since February 26, 1987, when the index ended at 330.11.
Early today, selling pushed the Kospi index down 15.96 points, or 4.8%, to 315.94 by midday.
Ironically, South Korea’s 55% foreign shareholding ceiling was abolished Monday, and the 25% limit for Pohang Iron & Steel and Korea Electric Power was expanded to 30%.
But foreign buying was focused only on a handful of blue chips, and Pohang was the only stock whose limit was filled up.
Disappointment that foreign investment was less than expected sparked near-panic selling, traders said. “Sell, sell and sell,” said Casey Choe, a senior equity trader at Indosuez W.I. Carr Securities. “The outlook for the market looks very gloomy.”
Analysts and brokers said the market was heading for the 300 level as more Korean companies almost assuredly will go bankrupt and labor unrest will increase during painful financial and corporate restructuring over the next three months.
Such fears surfaced Monday after state-run Korea Development Bank announced its plan to close unlisted KDB Securities.
The news drew the market’s attention to a corporate “carnage” list due to be released by banks this week.
A threat by a militant union group to stage labor strikes beginning Wednesday also cast gloom over the market, brokers said.
Brokers said the market worried their worst fears will come true after local elections June 4.
“I cannot rule out the possibility the index will fall below the 300-point level,” said Kim Junghan, a market analyst at the Korea Stock Exchange. “It’s really worrisome.”
Other Asian stock markets, meanwhile, were fairly subdued early today.
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In currency trading, meanwhile, the dollar rose Monday to near a seven-year high against the yen.
The gains continued today. The dollar was trading in Tokyo today at 137.31 yen, strongest since Aug. 20, 1991, when it traded at 138.40.
“Japanese economic fundamentals are so bad that Japanese have no choice” but to sell yen to invest abroad for higher returns, said Tetsuhisa Hayashi, a foreign exchange manager at Bank of Tokyo-Mitsubishi Ltd. “The weak yen trend has gained momentum.”
The U.S. currency yesterday rose more than 1 yen after the yield on Japan’s benchmark 10-year government bond yield fell to a record-low 1.21%. The yield was little changed early today.
The yield has fallen since Friday, when the Bank of Japan released minutes of its April 9 policy meeting showing that policymakers discussed the possibility of lowering the discount rate, now 0.5%, in the months ahead if the economy doesn’t pick up.
The Japanese economy hasn’t been able to get out of the woods, forcing the government to unveil a series of economy-boosting measures in recent months. The International Monetary Fund has forecast the economy won’t grow at all this year.
“The yen has been sold across the board,” said Hidenori Watanabe, chief dealer at Dai-Ichi Kangyo Bank Ltd. “The yen probably won’t rebound until after we see actual signs of Japanese economic recovery.”
Watanabe said such signs probably won’t be seen in the next month. He expects the dollar to reach 145 yen by the end of June.
The Tokyo stock market still managed to gain early today, adding 0.8% to 15,904.
In other trading Monday:
* Mexican stocks fell for the fifth time in six sessions on increasing concern that greater competition from Asian exporters will erode domestic companies’ profits.
The Bolsa index fell 0.8% to 4,612.29.
* Brazilian stocks fell to their lowest level in almost four months, led by state utilities.
Sao Paulo’s Bovespa index closed down 2.1%, or 219 points, to 10,021, its lowest level since February.
Analysts noted that repeated delays in the sale of Brazil’s state-owned utilities are having an effect on the market.
“Electric utilities are among the worst performers of the year,” said Antonio Carlos Rodrigues, who manages $65 million in equities at Banco Cidade in Sao Paulo. “The confusion and the delays on their privatization program made investors switch to other stocks, such as telecommunications and steel.”
* European markets, as they frequently have this year, provided the day’s bright spot. Germany’s DAX stock index set a record in Frankfurt, closing up 0.2% at 5,575.16. The Paris CAC-40 stock index finished up 1.5% at 4,108.71.
