"Stock Market 'IMF-level Turmoil'"...Forecast of Financial Market Turbulence on the 4th

President Yoon Seok-yeol declared a state of emergency on the 3rd, anticipating that the financial market will face turbulence on the 4th.

On this day, immediately after the emergency declaration, the night futures market surged rapidly. As of 11:30 PM, the 'iShares MSCI Korea ETF' was trading at $54.31, down 4.27% from the close of the U.S. market. The 'Franklin FTSE Korea ETF' also traded at $18.29, down 3.43%.

In the European futures market, the Euro Stoxx 50 futures were trading at 319.35, down 3.62% compared to before the emergency declaration. The trading volume surged from the usual 400-500 contracts to 15,000 contracts immediately after the declaration. In the night options market, the put option trading volume (29,000 contracts) more than doubled compared to the call option volume.

As of 3:30 PM, the won-dollar exchange rate, which was trading at 1,334 won per dollar, surged to 1,432 won per dollar by 11:45 PM.

Market participants expect that the next day's stock market will see a sharp increase in panic selling due to the emergency declaration. Many experts are concerned about the activation of circuit breakers. Circuit breakers are a system that temporarily halts all trading in the market to provide a cooling-off period for investors when prices plummet. <<In Korea, a single-level circuit breaker is activated when the index falls by more than 8% for 20 minutes. The circuit breaker has been activated only six times so far.>>

Experts expressed concerns about the uncertainty reminiscent of the 1998 foreign exchange crisis. A representative of a financial management company stated, "We should consider this as an 'IMF era,' as political uncertainty grows and national credit ratings are downgraded, domestic stock funds will all flee." He added, "If national credibility and credit ratings decline, the global bond index inclusion achieved last October could be canceled."

There are concerns that massive foreign sell-offs could follow on the 4th. A securities firm research committee member said, "Foreign investors who were waiting for the emergency declaration will unleash a massive sell-off," adding, "Until the emergency situation is resolved, foreign sell-offs will continue to increase." He further stated, "There are almost no measures investors can take to respond," and "As the supply dries up, the situation will worsen, and investors who have made a bet will have to settle quickly."

Especially, if the won-dollar exchange rate surges to the 1,425 won range immediately after the emergency declaration, foreign capital outflows could accelerate. This is because a rise in the won-dollar exchange rate triggers currency swaps. A representative of a financial management company said, "Political uncertainty is the part that foreign investors want to avoid the most, so the speed of capital outflows will increase."

A financial management company employee said, "First of all, it will be extremely difficult to avoid risky assets," adding, "Korean stock investors will want to hold onto real cash."

The uncertainty of the bond market is also expected to increase. A securities firm researcher said, "This situation will naturally increase uncertainty in the bond market," adding, "Especially in the bond market, as Korea is classified as an advanced country, the mobility of foreign capital is likely to increase."

A securities firm researcher warned, "If the CDS spread jumps sharply, corporate financial costs will rise, and the credit crunch could occur."

In the semiconductor, secondary battery, and other key export industries, domestic political uncertainty, along with the high interest in the U.S. presidential election, could further deteriorate, leading to a significant downturn in the stock market at the end of the year. A representative of a financial management company said, "Even if the market stabilizes later, concerns about political uncertainty will linger like a tail on the domestic stock market for a while."

There is also cautious analysis that it could be an opportunity for bargain hunting. A representative of a financial management company said, "If foreign investors sell off as much as they did during the internal political turmoil, it could become an opportunity for buying," but another representative said, "Although it could be an opportunity for bargain hunting, the situation is unpredictable, so we must approach it cautiously." Sim Seong-mi/Park Han-shin/Yang Hyeon-joo/Bae Tae-woong/Lee Si-eun/Jo Ah-ra reporters smshim@hankyung.com