Following a massive sell-off by foreign investors totaling $13.2 billion in South Korean stocks last week, market volatility soared to near-historic highs on Monday, causing significant swings in the Kospi index and prompting a temporary suspension of program trading by the exchange.
Amid inflation concerns and surging U.S. Treasury yields, the Kospi index fell over 4% in early trading, extending a 6% decline from the previous Friday. Goldman Sachs described Friday's drop as having "wiped out the week's gains against a backdrop of strong foreign outflows."
The Kospi Volatility Index rose 2.56% on Monday, approaching the highs seen in early March.
According to Goldman Sachs data, overseas investors withdrew approximately $17 billion from emerging Asian markets excluding China last week, marking the second-largest weekly outflow on record. South Korea accounted for the vast majority of this, with outflows reaching $13.2 billion.
On Monday, the Korea Exchange briefly suspended some program trading after a sharp decline in stock index futures triggered the so-called "sidecar" mechanism designed to curb market volatility. This circuit breaker was activated following a 5% plunge in Kospi 200 index futures, halting program trading for five minutes.
This reversal occurred after the Kospi index had just surpassed the 8,000-point milestone for the first time last week, driven by enthusiasm for AI-related stocks, chipmakers, and retail investor buying.
However, as of the latest update, the Kospi index has turned positive, gaining up to 1% intraday and reversing an earlier decline of approximately 4.7%. News emerged that Samsung's union will participate in a second round of government-mediated negotiations, and a South Korean court partially approved Samsung's injunction request against the union, demanding the company maintain normal business operations. Investors subsequently bought shares of major chipmakers, with Samsung Electronics rising nearly 6% and SK Hynix gaining close to 3%.
The latest reports indicate that Samsung Electronics' union stated in a declaration on Monday that despite the district court partially approving the company's injunction request, they will proceed with their planned strike as scheduled. The union stated they respect the court's injunction.
Strategists at Citigroup noted that the South Korean market now "looks much more overbought than the U.S. market," prompting the bank to reduce its exposure to bullish Korean trades. The Citigroup strategists wrote:
"While we believe it is too early for tighter financial conditions due to interest rate factors to cause a severe market correction or end the bull market, the Kospi index looks much more overbought than the U.S. We are prudently taking profits on half of our positions."
The bank noted more signs of "frenzy" among South Korean domestic retail investors. This group has become a major buyer of Korean stocks this year, often rushing in through margin trading and leveraged exchange-traded funds (ETFs).
Citigroup stated this does not mean the Kospi rally is over, "but it does mean risks have risen."
These comments highlight growing market concerns that surging global bond yields and geopolitical tensions are beginning to pressure some of Asia's best-performing stock markets. Citigroup pointed to a "breakout in long-term yields globally," with Japanese and UK government bond yields climbing sharply due to concerns over persistent inflation and rising oil prices related to the Iran conflict.
However, both Citigroup and Goldman Sachs believe the rally in South Korean stocks could continue.
Goldman Sachs estimates that South Korean retail investors bought $14.1 billion worth of stocks last week.
Citigroup stated it is taking profits on half of its Korean trading positions—rather than exiting completely—as it also expects the South Korean market to be one of the biggest beneficiaries of upcoming passive fund inflows from index provider MSCI's imminent rebalancing.
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