South Korean Stocks, Currency Sink as S&P Cuts U.S. Debt Rating

South Korea’s stocks tumbled the most in nearly two years and the currency had its biggest loss of 2011 after a Standard & Poor’s downgrade of the U.S. debt rating heightened concern the global economic recovery will stall.

The Kospi index dropped 3.8 percent to close at 1,869.45 n Seoul, the biggest decline since November 2009. The gauge slid 14 percent in the past week, prompting the exchange to say today that it will monitor the market more closely. The won slumped 1.5 percent to 1,083.23 per dollar, earlier touching a six-week low of 1,084.40, according to data compiled by Bloomberg.

“We’re seeing real panic-selling now,” said Im Jeong Jae, a Seoul-based fund manager at Shinhan BNP Paribas Asset Management Co., which oversees about $29 billion. “Concerns about global economic conditions are affecting Asian markets overall. Korea, which has relatively more liquidity, is feeling a harder pinch.”

S&P lowered the U.S. sovereign rating by one level to AA+ on Aug. 5, citing the failure of the political system to rein in the budget deficit and warned further downgrades may follow. Gold rose to a record as investors favored the safest assets.

Program trading on Kospi shares was stopped for five minutes from 1:23 p.m. local time after Kospi 200 Index futures fell more than 5 percent for more than a minute, Korea Exchange Inc. said. Trading of shares on the Kosdaq, which has 1,030 stocks, was temporarily halted after the index tumbled in excess of 10 percent for more than a minute, triggering automatic curbs. The tech-heavy gauge plunged 6.6 percent today, its worst performance since November 2008.

Close Watch

The exchange operator will keep a close eye on short-selling and arbitrage transactions, Korea Exchange said in an e-mailed statement today before markets opened, after an emergency meeting by Chairman Kim Bong Soo and other officials. The bourse will hold a meeting every day before the market opens, the statement said.

South Korean stocks fell more than expected as investors overreacted to developments abroad, said Min Sung Kee, director general of the financial markets department at the Bank of Korea.

“It seems investors, mostly individual investors, are responding excessively in so-called herd behavior,” Min said in a telephone interview from Seoul today.

The Kospi has dropped 8.9 percent this year, pushing valuations of the 780 member stocks down to 9.2 times estimated earnings. That compares with 9.9 times for the MSCI Emerging-Markets Index.

South Korea’s stock market is likely to find a “bottom” this week, according to Kim Hee Seok, head of the investment strategy division at National Pension Service, the nation’s biggest investor.

Bonds Gain

Overseas investors were net sellers for a fifth day, divesting a net 77.4 billion won ($72 million) of Kospi equities, according to Koscom Corp., which provides financial data from Korea Exchange. They have sold a net 2.55 trillion won this year.

South Korea’s government bonds were little changed, leaving three-year yields at their lowest level since June 16. The rate on the 3.5 percent notes due June 2014 was 3.62 percent, according to prices from Korea Exchange.

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