On the 2nd, the KOSPI index plunged more than 5%, slumping below 5,000 points reached in the new year. It was the biggest drop since Apr. 7, when the stock market crashed amid continued "panic sell" following the Donald Trump administration's release of an aggressive tariff policy last year, with the KOSPI down 5.57%. The market capitalization that evaporated in the main board alone that day was 200 trillion won.
The trigger for this week's stock plunge was also a decision by the Trump administration. President Trump nominated Kevin Warsh, known as a "hawk," as the next chair of the U.S. Federal Reserve (Fed), sending global risk asset prices sharply lower across the board.
Still, the drop in Korea's stock market was unusually steep. Stocks in China, Japan and India also fell 1% to 2%, but the KOSPI index dropped more than 5%. Since the KOSPI index had surged sharply in the new year, outside shocks had a bigger ripple effect, analysts said.
On the 2nd, the KOSPI index fell 274.69 points (5.26%) to close at 4,949.67. Early in the session, inflows of retail funds narrowed the losses, but the index crashed as foreigners unloaded large-scale sell orders (a net sell of 2.5 trillion won). Foreign investors also were net sellers of nearly 1 trillion won in the futures market that day. Program trading produced more than 3 trillion won in net selling as well.
During the session, KOSPI200 futures (near-month) fell more than 5% for over a minute, triggering a sell-sidecar that suspends the effectiveness of program sell quotes. From the time the sell-sidecar was triggered, program sell quote effectiveness was halted for five minutes and then automatically lifted, but the sharp declines in cash and futures prices continued.
The reason the news that Kevin Warsh was nominated as the next Fed chair dealt such a blow to the domestic stock market is concern that the abundant liquidity environment so far could change.
The nominee, Warsh, is well known for stepping down from the Fed Board in 2011 after opposing the Fed's quantitative easing (pumping money into the market) policy, which was introduced as a remedy after the global financial crisis. Warsh criticized that the Fed's unlimited money printing does little to help the real economy while distorting markets by creating asset bubbles. He has also repeatedly signaled a commitment to maintaining a strong dollar.
Investor sentiment toward emerging market stocks, including Korea, froze immediately. The liquidity supplied by the Fed had provided momentum for emerging market stocks, which are classified as risk assets. With prices already having surged, the "Warsh shock" prompted a wave of profit-taking.
Lee Eun-taek, a researcher at KB Securities, said, "After Kevin Warsh was nominated as a candidate for Fed chair, confusion has appeared in the asset market, and this could last longer," and noted, "In particular, in assets that had surged, such as precious metals and emerging market stocks like Korea, which are on the opposite side of the dollar, the desire to take profits could grow."
On the main board, 799 stocks fell while only 117 rose. Shares among top market-cap names mostly dropped sharply. As profit-taking concentrated in Samsung Electronics and SK hynix, their prices plunged 6% to 8%. Korea Zinc also took a direct hit from falling global commodity prices.
The KOSDAQ market, which had recently been rallying, also saw a sharp correction. The KOSDAQ index fell 51.08 points (4.44%) to close at 1,098.36 that day. It attempted a rebound early in the session, but the index crashed as retail funds fled en masse, centered on exchange-traded funds (ETFs).
As the dollar turned stronger, the won's value tumbled. The won-dollar exchange rate finished the regular session up 24.8 won at 1,464.3 won.