South Korea's stock market experienced a severe downturn on Tuesday. The benchmark KOSPI index plummeted over 7% during the session before paring losses slightly; the latest quotes show it down 6.6%. Shares of Samsung Electronics Co Ltd tumbled approximately 8% for the day, while SK Hynix Inc fell more than 7%. The selling pressure quickly spread beyond the region—the MSCI Asia Pacific index dropped 1% to 272.78 points, and Nasdaq 100 index futures extended their decline to 0.9%.
The trigger for this wave of selling was the release of Samsung Electronics' quarterly results. A deeper source of the volatility was the concentrated unwinding of persistently accumulated leveraged positions in the Korean market following the earnings announcement.
Earnings Paradox: Stronger Numbers, Sharper Decline
Samsung Electronics reported a second-quarter operating profit that surged 19-fold year-over-year to 89.4 trillion won, exceeding the analyst consensus estimate of 84.2 trillion won. Revenue doubled to 171 trillion won, also surpassing the market forecast of 169.2 trillion won.
This growth was driven by robust demand for high-bandwidth memory from AI data centers. However, the market had already priced in this positive news ahead of the report. Prior to the earnings release, the U.S. semiconductor stock index rose 2.2% on Monday, with the S&P 500 gaining 0.7% and the Nasdaq 100 advancing 1.3%. The "sell the news" dynamic played out as investors took profits.
Leveraged ETFs: A Pro-Cyclical Amplifier
A significant structural factor contributing to the severity of the Korean market's decline is the presence of single-stock leveraged ETFs.
On May 27 this year, Korean financial authorities approved the country's first batch of such products, launching 16 ETFs linked to Samsung Electronics and SK Hynix. These products are designed to deliver twice the daily return of the underlying stock. To maintain their target leverage ratio, they must buy as the stock price rises and sell when it falls—inherently creating a pro-cyclical effect.
The products were an instant hit upon launch. Data shows that 14 leveraged ETFs recorded a combined trading volume of 212 trillion won (approximately $138.6 billion) in June alone, accounting for 26.6% of total ETF turnover during that period.
The Bank of Korea issued a warning last Sunday in a written response to an inquiry from opposition lawmaker Park Sung-hoon, stating that these leveraged ETFs "could reinforce one-sided trading behavior and further exacerbate market volatility when investors flock in or out en masse; if stock prices experience a sharp decline, ETF redemptions and portfolio rebalancing could amplify losses for retail investors and trigger broader market instability."
This stance is notably stronger than the language used in the central bank's Financial Stability Report on June 24, which at the time suggested such products "could help provide domestic alternatives, curb capital outflows, and attract foreign investment into Korea."
Lee Chan-jin, the head of South Korea's Financial Supervisory Service, had previously stated publicly on June 22: "We pushed ahead too hastily back then. Looking back, I regret approving these products, and perhaps I should have done everything I could to prevent their approval."
Analysis has pointed out that historical patterns offer a warning: during periods in 2017 and 2021 when the Korean stock market peaked and subsequently entered a sustained downtrend, leveraged ETF assets under management paradoxically continued to rise, a pattern highly similar to the current situation.
Japanese Bonds: Safe-Haven Flows into Long-Dated Debt
In contrast to the equity market turmoil, a Japanese long-term bond auction revealed clear safe-haven demand.
On Tuesday, Japan auctioned 30-year government bonds, with a bid-to-cover ratio reaching 4.55, the highest level since 2019 and significantly above the 12-month average of 3.41. Capital flowed into long-term government bonds as equities came under pressure, indicating a rise in risk-off sentiment.
Meanwhile, the Japanese yen remained under pressure around the 162 level against the U.S. dollar, hovering near its lowest point in nearly 40 years. The yen weakened to 217.09 against the British pound, its lowest level since 2007. Markets remain on alert for potential intervention by Japanese authorities, though no action has been observed thus far.
A senior currency analyst noted: "Markets had anticipated over the weekend that Japan might intervene again, taking advantage of lower U.S. holiday liquidity, but authorities did not act, leading to a partial retracement of the yen's recent gains."
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