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A monitor in the trading room at Hana Bank’s headquarters in central Seoul shows the closing KOSPI figure for Aug. 6, up 3.3% from the day prior. (Yonhap)

Stocks in South Korea and other Asian countries rebounded following a plunge prompted by economic jitters in the US. Given the increasing volatility in global stock markets, it’s unclear how this correction will play out.

The KOSPI closed trading on Tuesday at 2,522.15, up 80.60 points (3.30%) from the previous day. The rebound covered about one-third of the previous day’s record-setting 234.64-point decline.

A sidecar halt on trading was triggered while the KOSPI was clearing the 2,500 mark, with the market surging as high as 5.62% during the day. The KOSDAQ, which fell by 11.30% the previous day, closed at 732.87 on Tuesday, up 41.59 points (a 6.02% increase) putting it back above the 700 mark. 

Other stock markets in Asia that had also plummeted the day earlier rebounded sharply. Japan’s Nikkei 225 index rose a sharp 10.23% while Taiwan’s TAIEX also jumped 3.38%. The rebound was likely caused by backlash buying after the US purchasing managers index (PMI) in the service sector met market expectations overnight, easing fears of a recession.

A sharp drop followed by an abrupt spike signals investor anxiety. This is demonstrated by how the volatility index (VIX), which is often referred to as the “fear gauge” reached levels akin to that seen during the COVID-19 pandemic. 

On Monday (local time), the VIX surged to 38.57 — up 64.9% from the previous trading day, when it was at 23.39 — hitting the highest level since October 2020.

Growing fear in the market means that every little piece of good or bad news is followed by rapid spikes and falls in the index. The fact that most foreign investment funds and large institutional investors operate algorithmic trading systems, which automatically buy or sell when conditions that have been submitted in advance are met, also contributes to the dynamic fluctuations in the market. 

While this method minimizes intervention by humans prone to being caught up in the moment, it also has the disadvantage of encouraging wild swings in the market.

Despite the panic sell-off subsiding, many analysts are concerned that volatility could continue, depending on the content of upcoming economic reports. 

“Since concerns over a possible economic recession in the US will not be resolved quickly, the risk aversion in the financial markets will likely continue for the time being,” commented Choi Seong-lak, the head of the capital flows analysis department of the Korea Center for International Finance. 

This means that stock markets may be rattled again if data fueling fears of an economic recession comes out. The US consumer price index and retail sales index are scheduled to be announced on Aug. 14 and 15, respectively. 

The performance of large tech stocks such as those related to artificial intelligence (AI) and semiconductors, which have suffered major stock corrections, will also be of interest.

“This plummet has confirmed the excessive expectations for tech stocks, so future results may exacerbate the market’s disappointment,” said Shim Ji-hyeon, an analyst at Shinhan Securities. 

The direction of the yen-dollar exchange rate and the fate of the yen carry trade are also key variables. The faster the yen strengthens against the dollar, the more widespread fears of outflow could become. 

The economic and interest rate signals from Jerome Powell, chair of the US Federal Reserve, at the Jackson Hole Economic Policy Symposium on Aug. 22 will also be a key market-moving event. The escalation of the war in the Middle East is a possible disaster that could hit the markets at any time

By Kim Hoe-seung, senior staff writer; Nam Ji-hyeon, staff reporter; Lee Bon-young, Washington correspondent

Please direct questions or comments to [english@hani.co.kr]