The Bank of Korea Says "Stock Prices May Remain Weak for a Considerable Period if US Trade Disputes Spread"

Bank of Korea Releases Monetary and Credit Policy Report
Limited Impact on Stock Prices and Interest Rates Compared to Trump’s First Term
Effects Already Priced In... Prolonged Trade Dispute Could Bring Additional Downward Pressure

Analysis suggests that if the trade dispute prolongs due to tariff impositions by the new U.S. administration, the decline in domestic stock prices will deepen, and there will be increased downward pressure on long-term interest rates.

According to the Monetary and Credit Policy Report released by the Bank of Korea on the 13th, a review comparing the financial market impact of U.S. tariff policies with that during Trump’s first term indicates that the effect on domestic stock prices and bond yields is expected to be limited compared to the past.

During Trump’s first term (2018?2019), domestic stock prices and long-term interest rates rose before his administration took office but sharply declined after the implementation of tariff policies due to worsening earnings of domestic export companies, concerns over economic slowdown, and heightened risk aversion. In fact, the KOSPI rose 22% in 2017 but fell 13.7% between July 6, 2018, and August 23, 2019, as the U.S.-China trade conflict intensified and prolonged. Long-term interest rates also continued to decline after March amid concerns over economic slowdown triggered by mutual tariffs between the U.S. and China and escalating military tensions.

On the other hand, the Bank of Korea’s analysis suggests that during Trump’s second term, starting from the second half of last year, the negative impact of U.S. tariff policies has already been priced in by domestic stock prices and interest rates, limiting further declines. Domestic stock valuations have already dropped significantly below the long-term average due to concerns over weakening competitiveness in key industries such as semiconductors and emergency situations. Additionally, expectations of improved earnings in sectors benefiting from the new U.S. administration’s policies, such as shipbuilding and defense, are also expected to limit further declines.

Regarding long-term interest rates, analysis using the term structure model indicates that long-term market rates have largely priced in expectations of a base rate cut. The concentration of government bond supply (55?60%) in the first half of this year is also expected to partially offset downward pressure on interest rates.

A Bank of Korea official stated, "However, uncertainty related to U.S. tariff policies remains very high, and market participants’ caution is elevated, so attention should be paid to the possibility of increased market volatility. If the U.S. expands universal and reciprocal tariffs and other countries impose retaliatory tariffs, causing the trade dispute to spread or prolong, the upward trend in stock prices could be reversed, resulting in a prolonged period of weakness. U.S. Treasury yields could also decline, exerting additional downward pressure on government bond yields."