Kospi Rocked by Volatility as Middle East Risk and Leveraged ETFs Draw Blame

The Kospi opened modestly but extended losses from around 11:20 a.m., falling as much as 5% at one point to near 6,462, after earlier registering a 2.6% decline. The Kosdaq dropped about 4.7%, triggering a sell-side circuit breaker, with only around 200 advancing issues. Taiwan's Taiex fell roughly 2.5-3% and Japan's Nikkei closed its morning session down 0.8%, as Asian markets sold off in tandem.

On the flow side, foreigners were net buyers of Kospi shares to the tune of 160-330 billion won, while institutions posted an unusually large net purchase of 2.3-2.8 trillion won. Within institutions, proprietary trading desks bought over 1.7 trillion won and pension funds added more than 190 billion won. Retail investors, by contrast, dumped more than 2 trillion won, which panelists described as panic-driven selling.

Panelists noted a battle around the 120-day moving average near 6,591, warning that a break below could fuel trend-reversal fears. Samsung Electronics gained about 1% intraday while SK hynix fell roughly 3.5% to around 1.78 million won, showing a split even among large-cap chipmakers.

Investor deposits stood at 105 trillion won as of July 10, while margin balances eased to about 35 trillion won. Losses narrowed somewhat into the close, with the Kospi around 1.8% lower and the Kosdaq down about 4.4%.

One panelist said he re-read roughly 30 semiconductor reports published over the past month, highlighting two that had weighed on sentiment the prior day. One brokerage report suggested SK hynix earnings could slightly miss consensus relative to Samsung Electronics; even after roughly 4 trillion won in provisions, Samsung's operating profit around 89 trillion won still beat consensus, while hynix's heavier HBM exposure could mean a modest miss — not a negative signal for the broader chip cycle.

A second report, from a firm that has consistently called for hynix declines even before shares topped 2 million won, again set a target of 1.85 million won. Panelists said the report's rationale — China's entry into the memory supply chain, potential slowdown in hyperscaler capex, and cyclical peak logic — lacked sharp, specific evidence, concluding that nothing yet seen undermines the bullish view on the chip and AI ecosystem.

Samsung Electronics is due to report earnings on July 23 and SK hynix on July 29, followed by results from Meta, Google, and Amazon. Panelists said confirmation of continued AI capex from these reports could help stabilize sentiment.

One panelist disclosed he cut his position by 35% once the Kospi broke 7,000, framing the move not as bearishness but as raising cash to seize a better buying opportunity later. He said he plans to keep holding Samsung Electronics and SK hynix without selling, expecting their prices to converge with earnings.

Ahead of the US June CPI release at 9:30 p.m. that evening, consensus called for headline inflation to ease about 0.1% month-on-month, core around 0.2%, with year-over-year headline at 3.8% and core at 2.9%. Panelists said falling oil prices could push the print below consensus, and given already-muted market expectations, a benign reading could actually help stabilize sentiment.

New Fed Chair Kevin Warsh was scheduled to testify before the House Financial Services Committee at 11 p.m. that night, continuing into the following day. CME FedWatch showed odds favoring a full-year rate hold at roughly 60-40, with the earlier scenario of one hike followed by a 2027 cut largely fading from pricing.

Panelists observed that the Fed appears to have shifted from leading markets to reacting to them following repeated interventions by Trump, and argued this ambiguity itself adds to uncertainty. They noted Warsh has pushed a narrower-Fed-role thesis, forming five task forces on monetary policy, premised on the Treasury (under Secretary Bessent) taking the lead on broader economic direction while the Fed focuses on inflation.

Panelists cautioned that if the Treasury fails to fill that role effectively while the Fed also steps back, a policy vacuum could emerge, underscoring that clear communication remains key to reducing uncertainty.

President Trump's remarks the previous night suggesting a 20% toll on traffic through the Strait of Hormuz drew an immediate rebuke from Iran, which signaled talks could collapse. WTI jumped past $78 and Brent topped $80 in US trading. Around 11:20 a.m. Korea time, US Central Command announced it had completed a fresh round of strikes on Iran, reigniting market uncertainty.

Panelists said the past several days of an attack on a merchant vessel, retaliatory US strikes, Iranian counter-strikes, and threats to close the Hormuz strait mark a qualitatively different phase of geopolitical risk. Trump's suggestion that the broader Middle East settlement framework could be scrapped altogether added to concerns that noise the market had been absorbing had crossed a threshold.

Ten-year Treasury yields pushed above 4.6%, 20-year yields topped 5.1%, and the dollar index climbed past 100, all flashing risk-off signals. Taiwan's Taiex fell 2.8-3% following TSMC's June sales report and weakness in its US-listed ADR.

Trump is set to deliver remarks on Iran at 10 a.m. Korea time this Friday, the 17th, and markets are watching closely for tone that could spark further volatility.

Lee Kwangsoo argued the deeper problem behind the recent selloff isn't chip-sector worries or weak flows but erosion of trust in the market itself. He noted that Japan and Taiwan, exposed to similar chip-sector noise, fell only modestly — around 1% or less — while Korea plunged 6-7%, attributing the gap to leveraged and inverse ETF structures that multiply volatility several-fold.

He explained that once early panic selling by less experienced investors begins, it drags in long-term holders too, and leveraged structures then amplify the resulting declines in a vicious cycle. In this environment, regulators repeatedly saying they are 'reviewing' or 'discussing' measures on leveraged products only deepens uncertainty and encourages premature selling, he said.

Lee stressed that speed is everything for restoring trust in asset markets, contrasting this with a war, which the government cannot directly control — reforming leveraged ETF structures, he said, is something the government could act on immediately if it chose to. He called for swift steps such as halting related trading rather than dragging out discussions, repeatedly urging authorities to act faster.

While he maintained the Kospi's underlying fundamentals remain sound over the long term, his greatest concern was that repeated bouts of volatility like this could suddenly unravel the trust in Korean equities that had been painstakingly built up in recent years.