KOSPI falls to mid-5,000 level as AI profitability concerns grow

The KOSPI dropped to the mid-5,000 range in October as competition in the memory semiconductor industry and AI profitability concerns triggered a major market correction. Foreign investors intensified net selling in the electrical and electronics sector following a period of fluctuation in the high 6,000 range.

Following the freeze of the base rate, the domestic financial market showed complex trends as external volatility and industry-specific uncertainties converged. While ongoing tensions in the Middle East and rising long-term interest rates in major countries increased price volatility, concerns regarding the AI industry led to a decline in the stock market.

According to the 'Financial Market Trends (October 2026)' report released by the Bank of Korea on the 28th, Treasury bond yields in the capital market rose sharply following the base rate hike in August, influenced by the restructuring of Middle East tensions and rising international oil prices. However, since mid-October, the magnitude of this increase has partially reversed.

Treasury bond yields reverse rise due to government reduction in issuance

The reversal of the rising trend in the bond market was driven by the government's supply and demand management policies. As the government reduced the volume of Treasury bond issuance in October and signaled the possibility of further reductions in the future, concerns over the supply and demand burden in the bond market eased. Consequently, major yields fell in mid-October, recovering some of their previous gains.

The volatility of South Korean Treasury bond yields remained relatively small compared to major countries such as the United States. This is interpreted as a result of South Korea implementing base rate hikes relatively early and its favorable fiscal soundness being highlighted. In particular, ultra-long-term bonds with maturities of over 20 years fell significantly as the supply and demand burden eased due to the government's early repayments and reduced issuance volumes.

In contrast, short-term rates rose significantly due to the base rate hike and end-of-quarter supply and demand factors. The Treasury bond yield curve showed a flattening pattern, with mid-to-short-term rates rising and long-term rates falling. Despite the rise in interest rates, corporate bond credit spreads remained mostly stable due to favorable supply and demand conditions, such as a decrease in issuance volume.

KOSPI plunges to mid-5,000 level due to AI profitability concerns

The stock market underwent a major correction as external uncertainties and industrial factors overlapped. Following the last Monetary Policy Committee meeting, the KOSPI had fluctuated in the high 6,000 range due to strong exports and expectations for semiconductor demand driven by the launch of AI models; however, in October, it fell to the mid-5,000 range as concerns over AI profitability and intensifying competition in the memory semiconductor industry emerged.

Selling pressure from foreign investors also intensified. Since September, the scale of net selling by foreigners has expanded, a result of risk-aversion sentiment caused by uncertainty in the AI semiconductor industry combined with end-of-quarter rebalancing demand. Selling was particularly concentrated in the electrical and electronics sector.

In the credit market, flows between households and corporations diverged. While credit supply to households decreased, credit supply to corporations continued to increase, centered on bank loans. Bank loan rates rose significantly for both household and corporate loans following the rise in short- and long-term benchmark rates. In the case of household loans, mortgage loans for home purchases showed an increasing trend, but other loans saw an expanded decrease due to seasonal factors, such as decreased individual stock investment and the inflow of holiday bonuses.

Expansion of corporate loans and decrease in direct financing

Regarding corporate financing, the movements of bank loans and the direct financing market were in contrast. In September, the scale of increase in bank corporate loans expanded, centered on large corporations. This was influenced by banks strengthening their lending business as well as increased demand for funds by corporations for facility investment and the conditions of the corporate bond market. Conversely, although demand for working capital persisted, the increase in loans to small and medium-sized enterprises was somewhat reduced due to the impact of banks' write-offs of non-performing loans.

The direct financing market showed a declining trend. Due to the burden of issuance following the rise in market interest rates and the increase in the volume of maturing debt, corporate bonds continued a trend of net repayment. Commercial Paper (CP) and short-term bonds also turned into net repayments due to repayments for managing financial ratios at the end of the quarter.

Fundraising in the banking sector was relatively smooth. In September, bank deposits increased significantly, particularly demand deposits, which saw a large inflow of corporate funds. Demand deposits also increased slightly due to banks' efforts to secure deposits and the inflow of household funds, despite the maturity of large corporate deposits. On the other hand, demand deposits from asset management companies decreased, centered on MMFs. This was because corporate funds moved from MMFs to demand deposits at banks to manage financial ratios at the end of the quarter.

The Bank of Korea diagnosed that external instability factors, such as rising long-term interest rates in major countries, changes in global monetary policy, AI industry concerns, and Middle East geopolitical risks, could increase volatility in future financial markets. Additionally, the Bank emphasized that continuous attention is required regarding financial imbalance risks related to the housing market in the metropolitan area and household debt.

Source: original video (YouTube)