"Interest Rates Over War"... Investor Jitters as US Fiscal Deficit Nears 6%

According to Financial News, as the crisis involving the Islamic Republic of Iran drags on and volatility in global financial markets increases, some analysts warn that the domestic stock market could be shaken more by upward pressure on US interest rates than by geopolitical risks themselves.
According to the securities industry on the 3rd, a prolonged war tends to expand the fiscal deficit by simultaneously increasing US government spending and reducing tax revenues. If this trend continues, there is growing concern that the US fiscal deficit this year could exceed 6% of Gross Domestic Product (GDP).
Historical cases also show that the cost of war has been a direct burden on public finances. Since 1990, US war expenditures in the Middle East have ranged from 0.3% to 1.0% of GDP, and in the case of the Gulf War, the actual burden is estimated to have approached about 3%.
Analysts note that although the current war is smaller in scale than past conflicts, the longer it lasts, the more costs accumulate, making a heavier fiscal burden unavoidable. On top of that, existing uncertainties such as tensions with China are adding pressure, further worsening the US fiscal outlook.
The key concern is that this fiscal deterioration is not just a matter of national finances but is directly linked to upward pressure on interest rates. A widening fiscal deficit leads to increased issuance of government bonds, which in turn pushes market interest rates higher.
Currently, US interest rates are rising due to inflationary pressure from higher oil prices and fading expectations for rate cuts. Going forward, however, the fiscal deficit is likely to become a structural driver of higher rates. Such rate increases directly weigh on the domestic stock market, as a stronger dollar and a higher won–dollar exchange rate intensify the pressure of foreign capital outflows.
In particular, the domestic stock market, where foreign investors account for a large share of trading, is structurally sensitive to interest rate changes. In periods of rising rates, the market has repeatedly seen increased net selling by foreign investors and downward pressure on stock indices. Higher interest rates also raise the discount rate applied to equities, lowering valuations and putting additional pressure on growth stocks in particular.
Jeong Yong-taek, a researcher at IBK Securities, stated, "Amid ongoing uncertainty related to the war, the most important variable to watch is US interest rates," adding, "Interest rates are highly likely to become the decisive factor that shifts the future economic cycle."

[email protected] Reporter Choi Doo-seon Reporter