[Market ING] KOSPI Falls Back to 2,800 Level, Correction Expected for Now

The KOSPI, which had recovered the 2,900 mark after rising for seven consecutive trading days, has fallen back to the 2,800 range due to geopolitical risks originating from the Middle East. Given the sharp upward trend so far, it is expected that the KOSPI will undergo a correction this week (June 16-20) amid the Middle East crisis.

Yonhap News Agency

Last week, the KOSPI rose by 2.94%, while the KOSDAQ climbed by 1.67%. Kang Jin-hyuk, a researcher at Shinhan Investment Corp., explained, "Geopolitical risks in the Middle East led to a decline in risk appetite, causing the KOSPI to close lower for the first time in eight days, and also triggered a rebound in oil prices and the won-dollar exchange rate." He added, "In the past, Middle East risks have increased short-term volatility, but with mediation from countries like the United States, escalation was limited and these situations often presented buying opportunities. Depending on developments over the weekend, additional selling may occur this week, so caution is warranted."

Over the weekend, the sixth round of nuclear talks between the United States and Iran, which was scheduled to be held in Muscat, Oman, was canceled, and Israel continued its airstrikes across Iran. As Israel expanded its airstrikes from Iran's nuclear and military facilities to gas fields and missile bases, tensions in the Middle East have escalated rapidly. According to foreign news reports on June 15, Israel expanded its strikes to Iran's key energy facilities on this day, while Iran continued its attacks targeting major Israeli cities.

Given the sharp rally so far, this Middle East risk is expected to provide a pretext for a market correction. Shin Seung-jin, a researcher at Samsung Securities, analyzed, "If the Israel-Iran conflict does not escalate into a full-scale war, the impact on the market will be limited. However, since the recent rally has been steep, this geopolitical issue could serve as a justification for a short-term correction. Technically, the gap between the price and moving averages has widened considerably, so both time and price corrections are needed at this point." He added, "However, the extent of the correction is not expected to be significant."

There is also analysis that this Middle East risk is favorable for leading sectors such as defense and shipbuilding. Shin noted, "The leading sectors in the market, such as shipbuilding, defense, and nuclear power, are seeing gains spreading across the board. In fact, this geopolitical issue is favorable for these leading industries," adding, "Momentum for defense orders is growing due to increased military spending by Middle Eastern countries, and the need for nuclear power is rising in response to higher oil prices. Both factors are expected to provide positive momentum for stock prices."

Hwang San-hae, a researcher at LS Securities, said, "If the situation drags on like the Russia-Ukraine war, it could exert long-term downward pressure on the stock market through risk aversion, higher oil prices and inflation, and interest rate pressures." He continued, "While the situation is ongoing, it is advisable to focus on sectors that are immune to geopolitical risks, such as defense and shipbuilding. Once the risk is resolved, a rebound led by financials, holding companies, and nuclear power?sectors that benefited from the new government momentum?is expected."

There is also an opinion that geopolitical risks should be used as an opportunity to adjust portfolios. Lee Kyung-min, a researcher at Daishin Securities, stated, "Geopolitical risks generally have only a temporary impact on investor sentiment and do not change the long-term direction of financial markets." He added, "Short-term fluctuations should be addressed through portfolio adjustments."

The key events for this week include China's May retail sales, industrial production, and fixed asset investment on June 16, and the United States' May retail sales and industrial production on June 17. On June 19, the results of the U.S. Federal Open Market Committee (FOMC) meeting for June will be released.

Na Jeong-hwan, a researcher at NH Investment & Securities, said, "At this June FOMC, the U.S. Federal Reserve is expected to keep rates unchanged. However, with recent inflation indicators in the U.S. stabilizing and employment data slowing compared to the previous month, expectations for a rate cut are rising."

Lee also pointed out, "With a rate freeze at this FOMC now a foregone conclusion, market attention will be on the Summary of Economic Projections (SEP) and the dot plot. It is important to watch whether the consensus?currently reflecting two rate cuts in the dot plot from March?will be maintained. Along with a potential retreat in tariff policy by U.S. President Donald Trump, confirmation of the Fed's monetary policy stance is needed."