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S.Korean financial markets fall into panic on U.S. double-dip concerns

08-03-2011 14:28 BJT

SEOUL. Aug. 3 (Xinhua) -- South Korea's financial markets fell into panic on Wednesday due to renewed concerns that the U.S. economy may enter into double-dip recession.

The benchmark Korea Composite Stock Price Index (KOSPI) tumbled 58.61 points, or 2.76 percent, to trade at 2,062.66 as of 1:04 p.m. in Seoul bourse. The index plunged more than 3 percent at one time in the morning session.

"The agreement on raising the debt ceiling in the U.S. was not the end of the story. Concerns shifted back to the negative economic data in the U.S., which drove investors to dump stocks," Yoo Kyung-ha, a Seoul-based analyst at Dongbu Securities, told Xinhua.

The South Korean won dropped against the U.S. dollar due to a sharp fall in local stocks. The local currency was trading at 1,059.1 won against the U.S. dollar, down 8.3 won from Tuesday's close.

The won sank to 1,060.5 won earlier in the morning, falling below the 1,060 won mark for the first time in almost two weeks. The bond yields plunged as investors moved into relatively safer assets such as the country's government bonds.

The yield on the liquid three-year treasury notes dropped 5 basis points to 3.82 percent, and the return on the benchmark five-year government bonds lost 3 basis points to trade at 4.02 percent. Worries about the U.S. economic fundamentals started raising its head after the U.S. gross domestic product (GDP) data was announced last weekend.

The GDP expanded at an annual rate of 1.3 percent in the second quarter, following a 0.4 percent advance three months earlier. "The second-quarter GDP results made sure the fact that the U.S. economy has entered the soft patch," Yoo Chang-yong, an economist at Shinhan Investment Corp. in Seoul, said in a report.

Manufacturing and consumer spending data also boosted jitters over the U.S. economic slump. The Institute for Supply Management (ISM)' s U.S. factory index fell to 50.9 in July from 55.3 in June, underpinning concerns over deteriorating picture over the world's largest economy.

The U.S. Commerce Department said overnight the country's consumer spending fell 0.2 percent in June. It was the first drop in almost two years, and marked a turnaround from a 0.1 percent rise the previous month. U.S. stocks tumbled overnight on increased worries about the faltering economic growth.

The Dow Jones Industrial Average sank 265.87 points, or 2.19 percent, to 11,866.62. "In real terms, the U.S. economy has already entered into recession because the growth rate stayed around the 1 percent level in the first half. Considering inflation, the economy may be regarded as falling into recession," Lee Chul-hee, an economist at Dongyang Securities in Seoul, said by phone.

Lee forecast the U.S. economy would grow at an annual rate of 2 percent in the second half, but warned that it can be regarded nearly as a recession, calling the situation as a growth recession.

"The U.S. equity markets continued to decline for the second straight session and the descent was much sharper on Tuesday, weighed down by worries about the health of the U.S. economy and the risk of a double-dip recession on the horizon," United Overseas Bank said in a daily note.

The U.S. debt resolution also boosted concerns over the U.S. economic slowdown. Market watchers said the U.S. resolved its debt impasse, but the deal on the federal deficit cut will reduce room for additional stimulus, continuing to weigh on the economic recovery.

The Senate voted to ratify the compromised debt-limit bill overnight after the House approved the bill the previous day. Under the bill, the debt ceiling will be raised by at least 2.1 trillion U.S. dollars and the federal spending will be cut by about 2.4 trillion dollars over the next 10 years. President Barack Obama also signed his approval to put the bill into law before the August 2 deadline.

"The agreement on the federal deficit cut means room for additional stimulus would be reduced. It will weigh on the economic recovery amid the steadily weakening impact of the previous stimulus measures," Yoon at Shinhan Investment Corp. told Xinhua.

Lingering concerns over the possible downgrade of the U.S. credit rating and the European fiscal crisis are expected to boost volatility in the South Korean financial market. Moody's affirmed the U.S credit rating at AAA, but put its sovereign debt on negative outlook, while Fitch did not rule out placing U.S. debts on negative outlook after completing its ratings review by the end of August.

"The U.S. woes may still continue as there is still a probability of an U.S. credit rating downgrade as the rating agencies are still sizing up the deficit reduction measures. Investors refocused on the sovereign debt problems in Europe as well as a stalling U.S. economy," UOB said.

Meanwhile, market watchers said investors should not be worried about the U.S. economy excessively as the July economic data reflected the worst conditions caused by the European fiscal crisis and the spreading concerns over the possible default in the U.S.

"The July economic data in the U.S. reflected the worst conditions stemming from the European debt problems," Yoo at Dongbu Securities told Xinhua, forecasting that the U.S. economic data will be improved starting the fourth- quarter.

"The outlook for the U.S. economic growth was lowered due to various uncertainties such as the European fiscal crisis and the negative effect from the Japanese deadly earthquake. The July data can be regarded as the worst as it reflected the concerns over the potential default in the U.S.," Lee at Dongyang Securities said.

The economist, however, predicted that the global financial markets, including the South Korean one, will be stabilized if the U.S. Fed announces in the next monetary policy meeting that it is ready to take measures to tackle the potential economic slowdown.

Editor:Wang Xiaomei |Source: Xinhua

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