Warsh Warning: Fed May Keep Rates High, Sending KOSPI into Slide

South Korean stocks and bonds experienced a broad pullback after former Fed governor Kevin Warsh warned that US interest rates could remain higher than expected. According to Warsh, the Federal Reserve may still need to raise rates if inflation does not convincingly approach 2%. This prospect raised concerns among investors, who tend to increase borrowing costs when they anticipate higher US rates.

The KOSPI index dropped by 2.46%, with chip giants Samsung Electronics and SK Hynix leading the decline at -2.72% and -3.27%, respectively. Korea's government bond yields also increased in response to the higher expected rates. Notably, foreign investors were net sellers of $347.2 billion worth of Korean shares, indicating that global funds are trimming their exposure to more volatile equity markets.

The impact of Warsh's comments is significant because it can affect not only US Treasuries but also other markets globally. Higher expected US rates make dollar borrowing and currency hedging pricier, which often prompts global funds to reduce their exposure to equity markets first.