South Korean stocks have had a difficult start to the year amid heightened geopolitical risks, weak economic data, and the potential for higher-for-longer interest rates. The KOSPI Composite index plunged to KRW 2,490, its lowest point since December 7th. It has retreated by 6.40% from its highest point this year even after South Korea banned short-selling.

Global stocks are on edge as geopolitical risks rise. On Monday, Houthi rebels attacked a US merchant ship, raising the possibility of a wider crisis in the region. On the same day, Iran carried out a strike near a US base in Iraq.

The implication of this is that shipping costs are expected to continue rising, hindering global trade. The closely watched World Container Index has jumped by more than 220% from its lowest point in December. 

Many ships have stopped using the shorter Red Sea route and opted for the longer Cape of Good Hope route.

At the same time, energy prices have remained resilient, with Brent crude oil nearing $80 a barrel. Natural gas prices have also jumped. All these are major factors that are affecting South Korean companies since most of them rely on global trade. 

There are also risks in the Korean peninsula after North Korea tested advanced systems this week. These tests risk an escalation in the region.

Recent economic numbers have sent mixed signals about the South Korean economy. South Korea’s exports rose by 5.1% in December after rising by 7.7% in the previous month. That increase was worse than the expected 6.6%. Imports crashed by 10.8% during the month.

Another report showed that South Korea’s manufacturing sector was contracting. The PMI retreated from 50 in November to 49.9 in December. A PMI reading of below 50 is a sign that a sector is not doing well. This is an important figure since South Korea is one of the leading industrial countries in the world. 

The unemployment rate also rose to 3.3% slightly while the central bank maintained a hawkish tone in its meeting last week. Economists at ING expects that the bank will ultimately cut interest rates in the second quarter of the year.

The KOSPI Composite index has also pulled back as some investors adjust their expectations for Federal Reserve cuts. There is a high chance that the Fed will only start cutting rates in June this year now that inflation has remained higher than the target of 2.0%.

KOSPI chart by TradingView

The daily chart shows that the KOSPI Composite index has been in a strong downtrend in the past few days. The index has retreated below the 50-day and 100-day Exponential Moving Averages (EMA). It has also dropped below the key support at KRW 2,535, the highest swing on November 30th.

The Relative Vigor Index (RVI) has moved below -0.20. Therefore, the outlook for the index is bearish, with the next point to watch being at KRW 2,400. The stop-loss of this trade will be at KRW 2,550.

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