Middle East Tensions Rattle Retail Investors as Kospi Drops 2.08% for Week; Brent Tops $117

Kospi posts a 2% weekly loss despite repeated rebounds

Brent tops $117 intraday as New York stocks retreat

Brokerages say high oil prices add downside pressure to equities

South Korean stocks have swung between gains and losses, and a fresh Middle East shock has added to the pressure. Fears of a military clash between the US and Iran sent international oil prices sharply higher and dragged New York stocks lower. Analysts say elevated crude prices could constrain any rebound in Korean equities by stoking inflation concerns and reinforcing expectations for further US monetary tightening.

According to the Korea Exchange, the Kospi closed 16.53 points, or 0.30%, higher at 5,550.30 on Oct. 23 from the previous session. The benchmark recovered from early losses to finish modestly higher, but still fell 2.08% for the week.

The Kospi changed direction every other day last week. It rose 1.76% on Oct. 19, then fell 3.73% on Oct. 20. It rebounded 3.29% on Oct. 21, only to drop 3.52% again on Oct. 22 and erase the previous day’s gains. Despite a slight rebound on the final trading day, the index remained stuck in the 5,500 range.

As domestic stocks struggled to find a clear direction, military tensions in the Middle East intensified. President Donald Trump said in a midterm campaign speech on Oct. 23 that “we may carry out another small ‘Majestic Wrath’ operation.” “Majestic Wrath” was the name of the joint US-Israeli operation in late February that struck Iran.

Earlier, the New York Times reported that the US and Israel were preparing plans to strike Iran again after the US midterm elections on Nov. 3. Washington is also reducing embassy staff not only in Saudi Arabia but also in Jordan, Lebanon, Qatar and the United Arab Emirates.

Iran has said it would place no limits on retaliation if it is attacked again. Senior Iranian officials told Reuters they had drawn up plans to target undersea cables in the Gulf. Threats to tankers passing through the Strait of Hormuz have also heightened concerns about disruptions to oil supplies.

International oil prices jumped. Brent crude for December delivery settled at $116.72 a barrel, up 3.1% from the previous session. It climbed above $117 intraday, the highest level since April. West Texas Intermediate settled 3.8% higher at $103.27 a barrel.

Declining oil inventories are also adding to the strain. The US Energy Information Administration estimated that global crude inventories fell by an average of 1.9 million barrels a day in the third quarter and will decline by another 700,000 barrels a day in the fourth quarter. Concerns are growing that any military conflict that spreads to key oil facilities could further worsen supply instability.

The oil-price shock pushed all three major New York stock indexes lower. The Dow Jones Industrial Average fell 652.82 points, or 1.23%, to 52,215.16. The S&P 500 dropped 0.52% to 7,623.68, while the Nasdaq Composite slipped 0.21% to 25,955.34.

In Korea, oil prices and US monetary policy are also weighing on equities. Higher crude prices would raise transportation and production costs, potentially delaying price stabilization and increasing the chances of additional tightening by the Federal Reserve. The yield on the 10-year US Treasury rebounded to around 4.99% amid inflation concerns.

Lee Kyung-min, an analyst at Daishin Securities, said progress in US-Iran talks would remain limited ahead of the Nov. 3 US midterm elections. For now, he added, international oil prices are poised to stay high and act as downward pressure on stocks.

Kim Yeon-ji, Hankyung.com reporter kongzi@hankyung.com