End Of The Run For Korean Assets?

Having been bullish towards Korean assets over the past month, we believe that the near-term rally could be coming to an end, as technical pictures across a host of markets look to be signalling weakness ahead.

From a technical perspective, the KOSPI equity index has failed to break past its 2011 high and appears to be testing the shorter-term resistance-turned-support 2,000 level. A break past this level would bode poorly for Korean equities and we see the next level of meaningful support at 1,800. Concerns towards a tapering of the US Federal Reserve's asset purchases have resurfaced, consequently causing an easing in the recent surge in foreign capital inflows, which have in turned fuelled the recent strength in Korean assets. Indeed, foreign investors have been net sellers of Korean equities over the past week, reversing the net buying trend that we have witnessed over the past few months. Profit-taking has also likely helped cap further strength in the KOSPI index.

Also, as we outlined in our recent market strategy analysis (see 'Warning Signs For Asia FX', October 13), the Korean won is facing very strong technical resistance at the KRW1,050/US$ level. The currency has clearly failed to break beyond this level and could be set for a reversal. We are likely to see added pressure on the won should the trend of net selling of Korean equities by foreigners persist. Furthermore, we do not believe the Korean won has become a regional safe haven and the currency could still be subjected to a sell-off in times of global volatility (see ' KRW: Further Strength Capped Despite Improving Fundamentals', September 17).

Reversal In Place
South Korea - Benchmark KOSPI Index

Having been bullish towards Korean assets over the past month, we believe that the near-term rally could be coming to an end, as technical pictures across a host of markets look to be signalling weakness ahead.

Reversal In Place
South Korea - Benchmark KOSPI Index

From a technical perspective, the KOSPI equity index has failed to break past its 2011 high and appears to be testing the shorter-term resistance-turned-support 2,000 level. A break past this level would bode poorly for Korean equities and we see the next level of meaningful support at 1,800. Concerns towards a tapering of the US Federal Reserve's asset purchases have resurfaced, consequently causing an easing in the recent surge in foreign capital inflows, which have in turned fuelled the recent strength in Korean assets. Indeed, foreign investors have been net sellers of Korean equities over the past week, reversing the net buying trend that we have witnessed over the past few months. Profit-taking has also likely helped cap further strength in the KOSPI index.

Resistance Proving Tough To Break
South Korea - Exchange Rate, KRW/US$

Also, as we outlined in our recent market strategy analysis (see 'Warning Signs For Asia FX', October 13), the Korean won is facing very strong technical resistance at the KRW1,050/US$ level. The currency has clearly failed to break beyond this level and could be set for a reversal. We are likely to see added pressure on the won should the trend of net selling of Korean equities by foreigners persist. Furthermore, we do not believe the Korean won has become a regional safe haven and the currency could still be subjected to a sell-off in times of global volatility (see ' KRW: Further Strength Capped Despite Improving Fundamentals', September 17).

Looking Good, For Now
South Korea - 5-Year CDS, bps

In line with the positive macro signals that we have witnessed of late, the Korea 5-year CDS has made a multi-year low, standing at 58 basis points at the time of writing. While we harbour sanguine expectations towards the Korean economy in the long term, we highlight that the country still faces a number of structural risks and we could see the price of Korean protection head higher as economic conditions start to deteriorate in 2014.

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Geography: South Korea
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