(Bloomberg) -- As South Korea’s political crisis enters its second week and hurts its stocks and currency, investors are looking at policy tools that can be deployed should the rout deepen.
The Kospi Index has lost 5.6% since President Yoon Suk Yeol’s botched martial law imposition, while the small-cap Kosdaq Index has slid even more. The won weakened more than 2% against the dollar. The country’s assets are among the world’s worst performers during the period.
A key focus is on the 10 trillion won ($7 billion) stock stabilization fund, which authorities have said is ready to be mobilized “immediately” when needed. There’s been much speculation as to when money will be put to use, with the most recent deployment dating back to 2008.
Traders say authorities are likely to monitor the pace of declines while also tracking flows of retail investors, who have cashed out more than 1 trillion won over two sessions. The Financial Services Commission declined to comment on the trigger points.
On the currency front, the Bank of Korea said it would take a variety of steps including boosting short-term liquidity if volatility rises.
Here’s what traders are saying about South Korea’s market stabilization tools.
Ease Volatility
“Stock stabilization fund could be helpful in smoothing out the market’s volatility, but it will not be enough to change global investors’ perception if there is no meaningful resolution of the ongoing constitutional crisis,” said Homin Lee, senior macro strategist at Lombard Odier in Singapore.
Sentiment Boost
“The stock stabilization fund would be the last resort,” so the government will exercise prudence before deploying it, said Seo Sang-Young, a market strategist at Mirae Asset Securities Co. “While it will have limits, it can help the market form a floor and shore up sentiment.”
“The size of the fund may not be enough to quell fear in the market,” said Jung In Yun, chief executive officer at Fibonacci Asset Management Global Pte. “The fund will be deployed with the aim of turning around investor sentiment, but with limited firepower. We expect Kospi at 2400 and 2300 as a psychological barrier.”
Limited Impact
With impeachment off the table, for now, “there is likely to be a slow malaise — there is little to create a positive catalyst for foreign investors and for retail, they will keep adding to their US equity holdings,” said Sat Duhra, portfolio manager at Janus Henderson Investors in Singapore. “This issue is not going to sort itself out for some time and a stabilization fund, as we have seen in China, will have limited impact when foreigners and locals are selling.”
Smoothing Operation
“Smoothing operation is part of the central bank strategy whenever market volatilities arise,” rather than protecting a level in the won, said Wee Khoon Chong, a senior APAC strategist at BNY in Singapore. While 1,440 is a key level to watch from a technical perspective as it would bring 2009 highs into view, “I think conditions are likely to stabilize soon and USDKRW would drift back lower closer to 1400 region.”
“So far, we have seen higher asset volatility in FX and equities but overall domestic funding conditions are relatively stable.”
--With assistance from Matthew Burgess.
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