South Korea's stock market is experiencing heightened volatility and divergence. On Tuesday morning, the KOSPI index saw a W-shaped pattern, briefly plunging nearly 3% before rebounding over 1% to reclaim the 6300-point level. In the afternoon, the index pulled back again but recovered into the close, finishing 1.62% higher at 6358.95 points. Driven by consistent net buying from institutional investors, the KOSDAQ index staged a strong intraday rally, which triggered a trading halt to suspend program buying, closing 5.88% higher. This marks the third consecutive trading day that a circuit breaker has been activated, following July 31 and August 3. So far this year, the KOSDAQ market has triggered a circuit breaker 30 times, with 17 instances triggered by buying and 13 by selling. Since July, volatility has intensified, significantly increasing the frequency of these halts.
Among individual stocks, the "memory duo" of SK Hynix and Samsung Electronics initially turned positive before retreating, but still closed up 0.64% and 0.21%, respectively. The South Korean finance minister has recently made frequent "calls" to stabilize the market. Finance Minister Koo Yun Cheol stated at a cabinet meeting that he would work to alleviate stock market volatility. He emphasized that South Korea will focus on improving market fundamentals to ensure long-term structural stability. The ministry will quickly implement recently announced measures to restrict the use of single-stock leveraged ETFs. Following the turbulent market movements, Koo earlier apologized for the hasty introduction of single-stock leveraged ETFs. Separately, according to a Korean media report from August 3, Kim Yong-beom, head of the policy office at the presidential office, is facing criminal charges related to the "hasty introduction of leveraged ETFs." President Lee Jae-myung's approval rating has fallen to a new low of 45.9%, impacted by the market crash and the controversy over leveraged ETFs, which have fueled economic instability.
To address the sharp market fluctuations, South Korea has recently implemented a series of deleveraging measures. It is reported that financial regulators are pushing to introduce an "emergency action authority," allowing them to quickly reduce the leverage multiple of single-stock leveraged products during emergencies. Currently, domestic single-stock leveraged products are designed to track 2x returns, but under an emergency authorization, the multiple could be lowered to 1.5x or even 1x. After regulators moved to curb speculative trading, the trading volume of stock leveraged ETFs in South Korea has plummeted. The largest single-stock leveraged ETF, tied to SK Hynix's performance, saw its Monday trading volume fall to 59 million shares, the lowest level since June 4. Volume for the smaller ETF linked to Samsung Electronics also dropped to its lowest since its listing in late May.
The easing of US-Iran tensions and cooling inflation are providing temporary support for South Korea's volatile financial markets. Data shows that the July CPI annual increase fell to 2.8% from 3.2% in June, below market expectations. Core CPI rose 2.6% year-on-year and 0.4% month-on-month. The key driver of this price deceleration was lower oil prices. In July, the year-on-year increases in South Korea's gasoline and diesel prices narrowed significantly, with month-on-month declines of 6.2% and 6.7%, respectively, effectively easing imported price pressures. However, inflation remains above the Bank of Korea's 2% target, and the risk has not fully cleared. The Bank of Korea raised interest rates in July and signaled further tightening, which has contributed to increased market volatility. In late July, key economic and financial officials, including Finance Minister Koo and Bank of Korea Governor Rhee Chang-yong, held an emergency meeting and announced a series of support measures.
The market holds a cautious outlook for the KOSPI's future trajectory. Kiwoom Securities analyst Han Ji-young noted that the oversold sentiment from last month's crash and Monday's sharp decline, coupled with an overnight surge in US stocks and a plunge in oil prices, has significantly boosted investor sentiment that was previously dampened by geopolitical uncertainty. However, with the risk of the semiconductor-heavy sector being absorbed, although institutional selling has slowed, the upside for the index is expected to be limited. "Rather than expecting a sharp rise in the index, it is more likely that the market will continue to test support levels, solidify the bottom in August, and gradually address the issue of excessive sector concentration."
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