A sharp rebound cannot ease fears of a widening Middle East conflict
On Thursday, South Korea’s stock market staged a dramatic rebound, a day after a dizzying crash. Yet the spectacle should not be mistaken for stability.
On Wednesday, the benchmark Kospi plunged 12.06 percent to 5,093.54, its steepest one-day decline since the aftermath of the Sept. 11 terrorist attacks in 2001. The selloff was triggered by escalating war fears in the Middle East. Circuit breakers halted trading as panic spread across the market. The “fear index,” the Kospi 200 volatility index, surged past 80 for the first time since its introduction in 2009.
By Thursday, the mood had flipped. The Kospi rebounded 9.63 percent to close at 5,583.9, snapping a three-session losing streak as bargain hunters returned and global markets steadied.
Even so, the index remains far below the 6,300 peak recorded on Feb. 26 that symbolized the optimism of the "Kospi 6,000 era."
The immediate trigger was the escalating conflict in the Middle East. US and Israeli strikes on Iran killed Supreme Leader Ayatollah Ali Khamenei, and Washington signaled the military campaign could continue. Iran’s political succession hardened expectations of confrontation rather than compromise. Markets quickly priced in the risk of wider war, pushing investors out of high-risk assets worldwide.
In South Korea the reaction was severe. The Korean won weakened sharply early Wednesday, at one point breaching the psychologically significant 1,500 per dollar level in offshore trading, the first such move since the global financial crisis.
Over two sessions the Kospi shed nearly one-fifth of its value before Thursday’s rebound.
Energy exposure explains part of the vulnerability. Roughly 70 percent of the country’s crude oil imports and more than 20 percent of its liquefied natural gas shipments pass through the Strait of Hormuz. Iranian threats to disrupt traffic through that corridor raise the prospect of surging oil prices, higher shipping costs and supply bottlenecks.
The market reaction also points to deeper structural weaknesses. South Korea’s stock market is heavily concentrated in a small number of exporters. When shocks hit sectors such as semiconductors, autos or shipbuilding, the effects ripple quickly across the entire index.
Recent gains had already stretched the gap between markets and the underlying economy. Over the past eight months, the Kospi doubled from around 3,000 to above 6,000, driven largely by global liquidity and aggressive retail investing rather than stronger fundamentals.
Growth last year hovered around 1 percent, industrial production slowed, and domestic consumption weakened. A market built on optimism can climb quickly. It can also fall just as fast.
Government intervention may help steady nerves. On Thursday, President Lee Jae Myung ordered a 100 trillion won ($68.3 billion) market stabilization program aimed at supporting financial markets and preventing a liquidity crunch.
Such measures may place a temporary floor under asset prices, but they cannot offset the pressures of high oil prices, a weakening currency and rising inflation if the Middle East conflict drags on.
The challenge extends beyond emergency management. Policymakers must strengthen market resilience and the broader economy through coordination among financial authorities, deeper foreign exchange markets and legislation supporting corporate investment.
It also requires confronting a harder issue: Korea’s dependence on imported energy routed through geopolitically fragile regions. Strategic reserves may buy time, but they cannot eliminate the vulnerability.
Thursday’s rebound offers relief, not a recovery. The violent swings of the past two days suggest more volatility ahead. In a world where geopolitical shocks travel instantly through financial markets, resilience may prove the more valuable benchmark than any headline index level.
khnews@heraldcorp.com
