KOSPI Falls Below 7,000 as High Oil Prices and High Rates Collide, Lee Kwangsoo's 'Humility Is Hard' Lecture Dissects Treasury Yield Structure

KOSPI Falls Below 7,000, Foreigners Sell for Second Straight Day The KOSPI index fell about 2.5%, sliding into the 6,800 range and failing to hold the 7,000 level. The KOSDAQ also widened its decline from 1.8% to over 2% by the close, dropping to the 810-point range. Foreign investors expanded their intraday net selling on the KOSPI exchange from roughly 1.5 trillion won to about 1.9 trillion won by the close, and also net sold about 300 billion won on the KOSDAQ. In the futures market, foreigners sold more than 1.1 trillion won for a second consecutive day, keeping supply-demand pressure elevated. The won-dollar exchange rate rebounded slightly overnight before weakening again, moving past the 1,347 won level. The market decline was attributed to a combination of factors: the rise in the U.S. August producer price index, oil prices breaking back above $100, fears of an Israel-Iran escalation, and an additional rate hike by the European Central Bank. Next week's schedule was also flagged as a key point to watch. With the U.S. Federal Open Market Committee, the Bank of Japan, and the Bank of England all set to announce rate decisions around September 17-18 Korean time, that period was cited as when monetary policy uncertainty should first be resolved. It was also suggested that once this uncertainty clears, semiconductor export data due around September 20 could serve as a catalyst for upward revisions to earnings estimates. Oracle's Earnings Surprise, Samsung Electronics and SK Hynix Earnings Estimates Need Upward Revision Oracle's fiscal 2027 first-quarter revenue came in at about $19.3 billion, exceeding the consensus estimate of $19.1 billion and up 30% year-on-year. Adjusted earnings per share of $1.92 also beat estimates and rose 30% year-on-year. Remaining performance obligations, which will be recognized as future revenue, reached $664 billion, up more than $200 billion year-on-year, confirming the expansion of AI cloud contracts. Cloud segment revenue rose 62% year-on-year to $11.6 billion, and the company issued annual revenue guidance of at least $90 billion, above expectations. On this news, the stock jumped more than 6% at one point after hours and rose more than 4% in early regular trading. Citing the surge in semiconductor exports in early September, Lee Kwangsoo noted that the third-quarter operating profit consensus for Samsung Electronics and SK Hynix remains too low. Current market estimates stand at about 113 trillion won for Samsung Electronics and about 78.3 trillion won for SK Hynix, but he calculated that reflecting the recent sharp rise in DRAM and HBM prices, Samsung Electronics' quarterly operating profit could rise to more than 140 trillion won. He projected that if this trend continues, annual operating profit could reach the 600 trillion won range, and assuming about half of operating cash flow is allocated to dividends, next year's total dividend payout could exceed 200 trillion won, pushing the dividend yield based on the current share price above 10%. For SK Hynix ADRs, JPMorgan was reported to have initiated coverage with a target price of $245. It assigned a 20% premium over the domestic shares, a figure said to reference the gap between TSMC's home-market shares and its ADRs. JPMorgan projected earnings-per-share compound annual growth of 34% over the next two years and said this upcycle could last more than five years, adding that stock momentum could strengthen if additional long-term supply contracts and updated shareholder return policies are disclosed at the third-quarter earnings announcement. Lee Kwangsoo assessed that the recent decline was not driven by deteriorating earnings or industry fundamentals but by valuation pressure stemming from Treasury yields, and that a recovery is therefore likely. Semiconductor Exports Surge in Early September, MLCC Also Signals Rising Demand Exports for September 1-10 totaled about $35 billion, a record for that period. Of this, semiconductor exports came to $16.5 billion, up about 65% from $10 billion in the same period last year. Lee Kwangsoo said that annualizing this ten-day growth rate for the full month suggests September semiconductor exports could reach about $60 billion. By product, DRAM exports rose about 79% and HBM about 87% month-on-month, which he said confirms the rise in memory prices in the data. News also emerged that Apple had renegotiated memory supply contracts ahead of its new product launch, prioritizing securing volume without a price cap, which was cited as further grounds for the memory price uptrend to continue for some time. In the MLCC segment, export value in early September rose about 65% from the previous month. After Murata, Japan's industry leader, announced it would scale back low-margin product lines and redeploy capacity toward higher-margin products, Samwha Capacitor, Amotech, and Kocheon, which are positioned to absorb that volume, surged. Samwha Capacitor triggered volatility interruptions twice intraday and rose about 20%, Amotech hit its upper limit, and Kocheon jumped more than 8%. Samsung Electro-Mechanics, however, fell about 1% on concerns of losing market share, showing that stock-specific interpretations of the news diverged. Nvidia CEO Jensen Huang identified cybersecurity as the next major application area for AI. Despite broad weakness in U.S. equities that day, security-related stocks such as CrowdStrike and Cloudflare saw only limited declines, while small- and mid-cap quantum security theme stocks in Korea surged. Early-September Semiconductor Export Growth by Item — Compares month-on-month growth rates of DRAM and HBM exports for September 1-10. HBM growth outpaces DRAM. Oil Breaks Back Above $100 on Iran-Israel Escalation Fears Both Brent and WTI crude surpassed $100, with WTI climbing to around $103. The White House suggested the conflict could persist throughout President Trump's term, and The Wall Street Journal reported that Iran has resumed ballistic missile production. Reports also emerged that Iran attacked around ten vessels in the Strait of Hormuz. It was confirmed that Saudi Arabia reported to OPEC that its crude output has fallen to its lowest level since 1990 following recent facility strikes. Lee Kwangsoo noted that oil breaking above the symbolic $100 threshold itself is stirring market sentiment, but pointed out that oil also surpassed $100 fifteen to twenty years ago before retreating as geopolitical conditions stabilized, explaining that oil is an asset driven by politics and geopolitics rather than supply and demand. He nonetheless acknowledged that accurately forecasting oil prices is very difficult, while noting that rising oil prices directly affect real-life costs such as food prices, meaning this burdensome trend is likely to continue for some time. U.S. August PPI and CPI Released, Treasury Yields Near 5% The U.S. August producer price index broadly matched market expectations on a headline basis, but an upward revision to the prior month's figure weighed on sentiment. In the sector heatmap, energy stood out as the largest gainer, interpreted as reflecting how rising oil prices pushed up producer prices. However, analysis also suggested that the rise in raw material costs has not yet been fully passed through to consumer prices, with companies absorbing part of the increase. The August consumer price index, due out that night, was expected to show a core month-on-month increase in the low-to-mid 0.2% range. JPMorgan noted that on a rounding basis, 0.2% would support a rate hold while 0.3% could justify a hike, marking this threshold as the variable that could determine the direction of monetary policy. U.S. Treasury yields rose sharply overnight, with the 2-year yield exceeding 4.5%, the 10-year yield reaching about 4.97% and nearing 5%, and the 20-year and 30-year yields both topping 5.4%. In the U.K., the 10-year gilt yield climbed to 5.29% ahead of next week's rate decision, its highest level since 2007. ECB Delivers Another Rate Hike, U.S. Treasury Long-Bond Buyback Falls Short of Target The European Central Bank raised its policy rate by 0.25 percentage points for the second time this year, moving it from 2.25% to 2.5%. President Lagarde said the decision was unanimous, that the ECB is not overly focused on the neutral rate, and that AI investment is a key driver of the global bond market repricing, remarks taken as hinting at a possible further hike in October — which in turn pushed Treasury yields even higher. The U.S. Treasury's long-bond buyback also fell short of market expectations. It was confirmed that the Treasury purchased only about $5.187 billion, short of the roughly $6 billion target that had been mentioned, and this was seen as weakening the policy intent to cap the upper end of yields. Following the news, U.S. Treasury yields rose further and stock market losses deepened. Lee Kwangsoo assessed that rate hikes framed as necessary to stabilize prices are failing to reassure markets, since they do not address the root causes — oil prices and the escalating conflict. [Kwangsoo's Take] Three Channels Through Which Rising Treasury Yields Pull Down Stock Prices Lee Kwangsoo distinguished between market interest rates and the policy rate, likening market rates to a thermometer measuring real-time temperature and the policy rate to a thermostat trying to regulate it. Left to the market, rates tend to move greedily, which is why central banks intervene to set the policy rate. He also noted that the U.S. Federal Reserve is not a government agency but an organization closer to a private consortium formed by member banks, explaining that even though President Trump appoints the chair, the banks that make up the board's shareholders mean monetary policy may not move entirely according to the government's wishes. He identified the first channel through which rising Treasury yields pull down stock prices as competition for asset allocation: as Treasury yields rise, the appeal of a guaranteed return increases, reducing investors' incentive to buy risk assets like stocks. The second is the expansion of the discount rate: since a stock price is the present value of a company's future earnings, higher rates lower the present value of future cash flows, which in theory should push stock prices down. He illustrated this with the question of whether one would rather have 1 million won a year from now or 1 million won today. The third channel is the rising cost of capital for AI investment-heavy companies. For companies that are not yet profitable and are funding data center investments with debt, higher rates raise interest costs, adding to concerns about a pullback in investment. He summarized that the combination of these three factors explains why the market has become particularly sensitive to Treasury yields recently. [Kwangsoo's Take] The Structure of the U.S. Fiscal Deficit Vicious Cycle and Rising Treasury Yields Lee Kwangsoo began with the principle that bond prices and bond yields move inversely. A bond's coupon rate is fixed, but its price in the secondary market fluctuates with supply and demand, so when supply exceeds demand and prices fall, the effective yield rises. He diagnosed that U.S. Treasuries are currently in this state. He identified the U.S. government's widening fiscal deficit as the root cause of rising supply. Mandatory spending items such as Social Security and Medicare are difficult to cut given an aging population, and defense spending is also hard to reduce, while he stressed that the item that has grown fastest recently is interest payments on Treasury debt. As the fiscal deficit widens, Treasury issuance increases; as increased Treasury supply pushes yields higher, interest costs rise further; and to cover those interest costs, more Treasuries are issued — a repeating vicious cycle. On the demand side, he noted that inflation is eroding the appeal of Treasuries. Even if a 10-year bond pays 5% annual interest, if prices are rising 6% a year over that period, holding real assets instead of bonds becomes the better calculation — meaning that inflation concerns stemming from the escalating conflict are themselves undermining demand for Treasuries. He argued that breaking this vicious cycle ultimately requires lowering rates, which in turn requires ending the war that is fueling inflation. Since the U.S. stands to gain relatively little from this conflict while its losses continue to mount, he expects pressure toward ending the war to grow over time. He also pointed out that tariff revenue appears to have been used to offset the tax revenue lost to corporate tax cuts, with the two amounts coincidentally similar in scale. He added that this raises the possibility of a corporate tax increase under a future change in administration, and that U.S. equities could see a shakeout around that time. [Kwangsoo's Take] A Long-Term Investment Thesis Seen Through a 100-Year Price Chart Lee Kwangsoo presented a chart showing that the U.S. policy rate has trended lower since the 1980s alongside rising national debt, arguing that once debt levels are already high, rates cannot be raised on a sustained trend and can only be lifted temporarily to address inflation. His long-term view is that this structural constraint will ultimately lead back to the end of the war and a return to a low-rate regime. He then presented a chart of price changes by product category over the past 100 years, noting that the common belief that all prices rise equally is not true. Over the same period, refrigerator and telephone prices actually fell, while New York hotel room rates and movie ticket prices rose. He explained that technological innovation has lowered prices faster than wages have risen, which is what has allowed the capitalist system to persist, and characterized AI as an extension of this same cost-lowering technological innovation. He named two reliable approaches to long-term forecasting — forecasting the very distant future, and forecasting outcomes that are essentially inevitable — saying that a forecast that the KOSPI will be higher in five years than it is now is the kind of prediction likely to prove correct. He closed the lecture by advising that surviving as an investor until that point requires avoiding large losses, and that maximizing returns requires adjusting one's response as market conditions change rather than simply holding on for the long term.