Following recent sharp declines and a brief rebound, the South Korean stock market is experiencing renewed severe volatility, with de-leveraging risks continuing to unfold and market stability still under pressure.
On the 11th, the Korea Exchange once again activated the programmatic buy-side circuit breaker (buy-side Sidecar), halting programmatic buy orders in the KOSDAQ market. After a significant intraday drop, the market gradually recovered to near flat levels by the close, indicating that market sentiment remains highly unstable.
This round of intense adjustment began with the "Black Monday" on June 8th, when the KOSPI and KOSDAQ indices closed down 8.29% and 9.08% respectively, triggering both the sell-side Sidecar and full trading halts during the session. A rebound occurred on June 9th, with both major indices again triggering the buy-side Sidecar, but the recovery momentum failed to sustain, and the market remained under pressure in the following days.
This downturn has been driven by a combination of continued foreign capital outflows and the forced liquidation of leveraged retail positions. The recent launch of single-stock 2x leveraged ETFs in late May has further amplified the market's volatility. Margin debt balances remain elevated, suggesting the de-leveraging process is not yet complete.
Market Volatility Persists as De-leveraging Continues
The trigger for this market turmoil was the sharp crash on June 8th. A confluence of factors including strong US jobs data fueling interest rate concerns, Broadcom-related news dragging down the semiconductor sector, pressure on the Korean won, and escalating Middle East geopolitical tensions led to the plunge. The KOSPI closed down 8.29% at 7484.41 points, while the KOSDAQ fell a deeper 9.08%. Both indices triggered the sell-side Sidecar and circuit breakers during trading. This resulted in the KOSPI recording a weekly loss of approximately 17%, its largest in recent years.
A technical rebound occurred on June 9th. The KOSPI briefly rose to 7847.74 points and the KOSDAQ climbed as high as 957.96 points, with both markets triggering the buy-side Sidecar in the morning—the KOSPI at 9:12 AM and the KOSDAQ at 9:28 AM.
However, the rebound momentum was short-lived. On the 11th, the market experienced another intraday decline before rapidly recovering most losses to hover near flat. The Korea Exchange's reactivation of the programmatic buy-side circuit breaker for KOSDAQ underscores that market sentiment remains fragile and two-way volatility has not subsided.
The Core Risk: Ongoing De-leveraging
The continued unwinding of leveraged positions is the core risk currently threatening the stability of the South Korean stock market. During this downturn, margin debt in the Korean stock market once reached a record high of 38 trillion won, with cumulative forced liquidation amounts nearing 300 billion won. The daily liquidation ratio hit a yearly high of 9.1% at one point.
The large-scale withdrawal of foreign capital and the mechanical liquidation of leveraged retail positions have created a feedback loop. The newly launched single-stock 2x leveraged ETFs, which debuted in late May, have further magnified market declines during this period of high volatility. With margin debt still at historically high levels, it indicates that forced selling pressure has not been fully exhausted, and potential downside risks remain a significant concern.
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