US deficit-driven rate shock: Is the KOSPI facing an even bigger wave?

Analysts warn that the South Korean stock market could be shaken more by upward pressure on United States interest rates than by geopolitical risks in the Middle East. They note that war-driven fiscal deterioration may ultimately push rates higher, weighing on markets across the board.
On the 5th, stock market experts pointed out that the ongoing war between the United States of America (US) and the Islamic Republic of Iran is simultaneously driving up US government spending and reducing tax revenues. As a result, some project that this year’s US fiscal deficit could exceed 6% of gross domestic product (GDP).
Historically, war expenses have translated directly into fiscal burdens. Since 1990, US war spending in the Middle East has amounted to about 0.3–1.0% of GDP, and in the case of the Gulf War, the actual burden is estimated to have reached around 3%. Although the current conflict is limited in scale, analysts argue that if it drags on, cumulative costs will inevitably expand the fiscal burden. On top of this, existing uncertainties such as tensions with China could further worsen the US fiscal position.
The problem is that fiscal deterioration does not remain a mere public finance issue. A widening fiscal deficit leads to increased government bond issuance, which in turn becomes a structural factor pushing market interest rates higher.
Rising interest rates directly pressure the South Korean stock market. Higher rates tend to strengthen the United States dollar (USD), driving up the won–dollar exchange rate and intensifying outflow pressure on foreign capital. This effect is particularly pronounced in South Korea, where foreign investors hold a large share of the market, making it highly sensitive to rate changes.
As of the 3rd, the won–dollar exchange rate stood at 1,511.4 won. It has remained in the 1,500-won range for eight consecutive trading days since the 25th of last month.
dschoi@fnnews.com Choi Doo-seon Reporter