The domestic stock market is collapsing without resistance. This month, KOSPI posted the biggest monthly drop since 1990, surpassing the slump during the IMF foreign exchange crisis, and for the first time ever, the Korea Exchange triggered circuit breakers for two straight days on the main board. In just a month, nearly 3,000 trillion won in market capitalization evaporated. Foreign selling, which seemed to ease briefly, has intensified again, and there are concerns that single-stock leveraged ETFs are further amplifying market volatility.
On the 29th, both the KOSPI and KOSDAQ markets saw sell-sidecars and circuit breakers triggered in succession for a second straight day. After plunging 10.84% the previous day, ranking fourth in the all-time daily decline rate, KOSPI fell more than 12% intraday again. The domestic stock market's capitalization, which had swelled to 7,997 trillion won on the 22nd of last month, fell into the 5,000 trillion won range on this day, shrinking by nearly 3,000 trillion won in a month.
The direct trigger for the market's plunge was SK hynix's results. SK hynix posted record earnings with second-quarter revenue of 79.3187 trillion won and operating profit of 60.5426 trillion won, but fell short of market expectations and failed to present a concrete shareholder return plan. On top of that, rising tensions between the United States and Iran sharply undermined investor sentiment.
However, the prevailing view in the market is that, beyond these negatives, mechanical selling further widened the losses. Foreign selling prompted stop-loss trades and position cuts, and rebalancing flows from single-stock leveraged and inverse ETFs added to it, creating a structure where selling begets more selling.
In fact, after foreigners net sold nearly 7 trillion won over the four sessions from the 20th to the 23rd and seemed to ease their selling briefly, they ramped it up again starting on the 24th. As of today, net selling over the past four sessions alone amounts to about 12 trillion won.
Foreign investors have dumped more than 18.4 trillion won in the Korea Exchange this month on a cumulative basis. By individual stock, they have net sold 7.52 trillion won of Samsung Electronics and 9.966 trillion won of SK hynix this month.
Individual money, meanwhile, has flocked to products that bet on declines. SOL SK hynix Futures Single-Stock Inverse 2X, which tracks -2 times SK hynix's daily return, recorded 5.8961 trillion won in turnover on the day, setting a new all-time high for trading value since listing.
Han Ji-young, a Kiwoom Securities researcher, said, "The explosion in single-stock inverse transactions is also boosting the output of ancillary volatility."
◇ First condition for a rebound is foreigners: "Still not enough signals they will return"
Brokerages agree that, to reverse the sharp slide, the return of foreign fund flows must come first.
Lee Kyung-soo, a Hana Securities researcher, said, "After a plunge, the structure is such that domestic supply-and-demand players fall into a groggy state due to forced selling and loss-cut effects, making foreign buying virtually essential," adding, "After the reduction of Korea's weighting in the MSCI emerging markets (EM) index, the key thing to watch is when passive money returns."
However, there are still no clear signs that foreign fund flows will return.
Noh Dong-gil, a Shinhan Investment & Securities researcher, said, "Foreign selling slowed somewhat in mid-July, but it is too early to interpret that as exhaustion," adding, "Even if the exchange rate stabilizes, foreigners do not immediately turn to net buying." He added, "A turn to net buying by foreigners should be confirmed by simultaneous net purchases in semiconductor spot and KOSPI 200 futures rather than by the won's direction."
◇ "20 trillion won balance intact" … Selling pressure grows with each drop
Single-stock leveraged ETFs are also singled out as a key factor amplifying volatility.
Lee Kyung-soo, a Hana Securities researcher, said, "The current net creations in single-stock leveraged ETFs are about 20 trillion won, far from the government's 5 trillion won target," adding, "If this balance does not shrink quickly, delta rebalancing (mechanical trades to readjust exposure to the underlying assets) to meet daily target returns could repeat with each stock price decline, extending the losses."
There is also analysis that individual investors' leveraged funds have not yet been sufficiently unwound. According to Shinhan Investment & Securities, the number of units in single-stock leveraged ETFs fell only 2.8%, from 741 million to 720 million, between the 22nd and the 27th.
Noh Dong-gil, a Shinhan Investment & Securities researcher, explained, "Leveraged ETFs are path-dependent, so during the rebound after a plunge, redemptions by investors who trimmed losses can come back as supply."