Kospi Index, South Korean won are slumping: what next?

South Korea’s stocks have retreated sharply in the past few weeks as the impact of the ongoing US-Iran war continued. The Kospi Index dropped by over 3.3% on Tuesday, down by 20% from its highest point this year, meaning it has moved into a technical bear market.

Kospi Index crashes amid South Korean exposure to Iran war 

The ongoing Kospi Index crash has coincided with the South Korean won crash. Data shows that the USD/KRW pair jumped to a record high of 1, 533 on Tuesday, its highest point since 2009. It has jumped in the last five consecutive weeks since the war started.

On the positive side, a weaker South Korean won may lead to higher exports from the country as its products become cheaper. A Reuters poll shows that exports likely jumped by 44.9% this month from the same period last year. If this is correct, it will be the fastest growth since 2021 and the tenth consecutive month of YoY growth.

South Korea’s government bond yields have continued rising in the past few months. The ten-year yield jumped to 3.945%, its highest point since November 2023. Similarly, the five-year yield soared to 3.8%, up sharply from last year's low of 2.356%.

The Kospi Composite Index has slumped as investors remained concerned about the ongoing US-Iran war, which has pushed crude oil and natural gas prices higher. South Korea imports most of its crude oil from the Middle East.

In addition to crude oil, the country's semiconductor companies like Samsung Electronics and SK Hynix have come under pressure amid the ongoing helium shortage, which normally comes from the Middle East. Indeed, the two stocks dropped by over 4% and 6%, respectively on Tuesday.

There are signs that South Korea’s inflation will keep rising as energy prices soars. If this happens, the country's central bank may decide to hike interest rates later this year, which explains why the country’s bond yields have soared.

Most South Korean stocks have slumped in the past few weeks since the war started. Koas, a top furniture company, has slumped by over 54% this year. CK Solution, Dynamic Design, Kwang Myung Electric, Uni Chem, and KB Star REIT stocks have slumped by over 40% in the same period.

The top companies like Samsung Electronics, SK Hynix, and Hyundai Motor have slumped by double digits as the war has escalated.

Kospi Composite Index technical analysis 

Kospi Index chart | Source: TradingView 

The ongoing Kospi Composite Index retreat is in line with our previous prediction, in which we pointed to the Wyckoff Theory.There are now signs that the index has moved to the distribution phase of the Wyckoff Theory.

The two lines of the Percentage Price Oscillator (PPO) have formed a bearish crossover pattern, while the Relative Strength Index (RSI) has slumped from the extreme overbought level of 88 to the current 55.

Therefore, the stock will likely continue falling, potentially to the key support level at KRW 4,500. Still, the index will likely bounce back later this year when there are signs that the war is ending.

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