The South Korean stock market surged on Wednesday, as the pressure from forced liquidations of leveraged positions that had suppressed the market for weeks appears to be nearing its end, offering a potential turning point for the persistently weak market.
The benchmark Kospi index climbed as much as 6.2% during the session, bringing its two-day gain to nearly 10%. Analysts from JPMorgan Chase & Co. noted in a report this week that the deleveraging process for leveraged ETF positions is approximately 75% complete. The Korea Exchange briefly triggered a program trading buy-side circuit breaker during the day—a mechanism that has become a hallmark of this $4 trillion market, whose volatility has at times exceeded that of Bitcoin.
Market Recovery Follows Steep Decline
This rebound follows a period of significant market value destruction. Since its peak in June, weeks of sustained selling have wiped out roughly $1.2 trillion in market capitalization from South Korean stocks, with the Kospi falling nearly 30% from its high at the lowest point. Market participants indicate the decline was primarily driven by a combination of leveraged ETF liquidations, a contraction in retail investor margin balances, and growing concerns over the sustainability of the memory chip sector's upcycle.
Deleveraging Pressure Eases Substantially
According to data from the Korea Financial Investment Association, as of July 16th, leveraged stock holdings by South Korean investors had fallen to a three-month low, with margin balances dropping to 33.4 trillion won (approximately $22.6 billion), a 13% decline from the peak at the end of June.
In their report, JPMorgan strategists including Mixo Das wrote that the unwinding of leveraged ETF positions is about 75% finished. Peter Park, Vice President of Equity Sales at NH Investment & Securities, stated in a research note, "With the toxic leverage significantly cut, the risk-reward ratio has clearly improved."
For many investors, these figures are positive signals of market stabilization. The tangible easing of deleveraging pressure suggests the mechanical selling force that previously dictated market direction is now weakening.
SK Hynix Leads Rally, Foreign Investors Return
The rebound was led by SK Hynix Inc, whose shares jumped over 9% on Wednesday. This followed a 14% surge in its American Depositary Receipts (ADRs) the previous day, driven by improved sentiment around artificial intelligence. SK Square, associated with SK Hynix, also rose, while chip giant Samsung Electronics Co Ltd gained more than 6%.
Foreign investors also participated in the rally. As of 11:10 AM local time on Wednesday, foreign investors were net buyers of over $1 billion worth of stocks in the Kospi market. This marks a return to net buying for the first time in about a month, following a period of record-breaking selling of local shares.
The return of foreign capital provides additional support to the market and partly corroborates market participants' assessment that deleveraging pressures are subsiding.
Volatility Remains a Key Feature
Despite the strong rebound, the recent extreme volatility in the South Korean market remains a cause for caution. The Kospi's nearly 30% drop from its peak in just weeks, followed by a roughly 10% rebound in two trading days, represents a magnitude of swing uncommon among major global markets.
The brief triggering of the program trading buy-side circuit breaker by the Korea Exchange again highlighted the market's high-volatility nature. Market participants note that the sustainability of the memory chip cycle remains an unresolved core variable, a fundamental uncertainty that has not dissipated with the easing of deleveraging pressure.
For investors, the completion of about 75% of the leveraged unwinding process means technical selling pressure has greatly diminished. However, whether the market can achieve a sustained recovery still depends on the alignment of fundamental factors, such as the outlook for chip demand and the continued inflow of foreign capital.
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