KOSPI Jumps 3.31% but Fed Rate Worries Threaten Recovery

South Korea's benchmark KOSPI climbed as much as 3.31% on Friday, reaching 5,738.18. However, that gain recouped less than half of the 7.57% fall the index suffered on Thursday.

US producer prices in September increased at the fastest pace in four and a half years, fueling expectations of a Fed rate hike. Such a move could limit any recovery, with the index still about 37% below its June closing high of 9,114.55.

Is the KOSPI Rebound Just a Rotation Out of AI?

According to Korea Exchange data, stocks outside the AI heavyweights posted the largest advances. Hanwha Aerospace, a defense and aerospace firm, gained 8.25% during the morning session. Samsung C&T, the construction and trading unit of the Samsung group, rose 5.79%.

By contrast, the memory chip companies that drove Korea's chip boom underperformed. Samsung Electronics added 2.14%, while SK Hynix climbed 1.82%.

Overnight on Wall Street, Nike and Home Depot led advances while AI and chip equities finished lower.

Can a Market at Eight Times Earnings Avoid a Second Leg Down?

The KOSPI is trading at roughly eight times earnings, based on data through Q2. That valuation level is similar to what was seen during the 2020 pandemic selloff, the 2008 financial crisis, and the 2003 credit card debt crisis.

KB Securities believes the decline overstated recession and earnings concerns. The brokerage sees a potential second bottom after July's low.

Such a pattern would create a W-shaped recovery, in which prices touch a bottom twice before moving higher.

Nevertheless, selling pressure could persist. Retail and foreign investors are pulling out, and Samsung Electronics and SK Hynix have finished their share repurchase plans.

U.S. inflation data that came in hot contributed to Thursday's KOSPI decline. As of that day, the South Korean market had fallen 18.8% in October, compared with drops of 3.5% for Japan and 2.0% for Taiwan.

Mirae Asset Securities analyst Kim Sung-geun said that the cash generation of big tech companies will determine how concerns over AI spending evolve. Credit default swap (CDS) premiums, which measure the cost of insuring against default, are increasing for Google, Microsoft, and Meta.

However, CoreWeave, an AI cloud provider with weaker finances, saw its premium exceed 1,000 basis points.

Friday's rebound indicates that buyers are willing to enter at around eight times earnings. But the cash generation of big tech and the Federal Reserve's next policy decision will determine whether this is a bottom or just a temporary halt.