Kospi Index slips as South Korean bond yields jump: buy the dip?

The Kospi Index retreated into a correction as the recent rally takes a breather amid overheating concerns. It retreated to KRW 7,250, down by 10% from the year-to-date high of KRW 8,038. It remains up by over 72% this year and 178% in the last 12 months. So, is this the end of the Kospi Composite Index rally?

South Korean stocks retreat amid overheating concerns

The Kospi Index has pulled back in the past few days, moving from the year-to-date high of KRW 8,038 earlier this month to the current KRW 7,250. 

This retreat has coincided with the rising concerns that the rally has led to overheating concerns. A good example of this is the fact that some foreign investors have continued selling their shares. They dumped over $13.2 billion in shares last week, fueling market volatility to a record high.

There are signs that some South Korean investors have also started selling their shares. Besides, these investors have already seen their wealth grow exponentially since last year. 

Some of the hottest stocks have pulled back in the past few days. Samsung Electronics dropped to KRW 277,500 from the year-to-date high of 299,000. SK Hynix shares have tumbled to KRW 1.79 million from the year-to-date high of KRW 2 million. 

Still, analysts believe that the Kospi Index is still not expensive enough. For example, the index has a PE ratio of about 27, a few points above the S&P 500 Index’s 23. Also, the index is cheaper than the Nasdaq 100 Index, which has a multiple of 35.

A potential catalyst for the index is the upcoming NVIDIA earnings that comes out on Wednesday this week. Strong numbers may point to more gains in semiconductor stocks that may benefit Samsung and SK Hynix.

South Korean bond yields have jumped

Meanwhile, there are concerns that the South Korean bonds have dumped in the past few months. Data shows that the ten-year yield jumped to 4.30% from the year-to-date low of 3.27%. Similarly, data shows that the five-year yield has jumped to 4.06%. 

Rising bond yields have continued amid the ongoing Iran war, which has pushed South Korean inflation higher. Recent data shows that the South Korean inflation has jumped to 2.6% in April this year as energy costs remain elevated. 

South Korean companies are affected by the rising yields because it boosts the amount they pay when borrowing. 

At the same time, the South Korean won has continued falling in the past few days. The USD/KRW pair rose to 1,505, its highest level since April 7 this year. It has jumped by 4.63% from its lowest point last month.

Kospi Index technical analysis 

Kospi Index chart | Source: TradingView

The daily chart shows that the Kospi Composite Index has pulled back in the past few days. It has slumped from the year-to-date high of KRW 8,048 to the current 7,225. This retreat happened as it formed a small double-top pattern, a common bearish reversal sign.

The two lines of the Percentage Price Oscillator have formed a bearish crossover and are pointing downwards. Also, the Relative Strength Index (RSI) has moved from the extreme overbought level of 84 to the current 56.

Therefore, the index may continue falling as sellers target the key support level at KRW 6,354. A move above the YTD high of 8,048 will invalidate the bearish outlook.