KOSPI Drops 7.9% as Leveraged ETFs Deepen ‘Meta Shock’; Focus Shifts to Samsung Earnings

Korean stocks plunge 7.8%; Japan drops 2.4%, China falls 2%

Fund managers sell cash equities and futures late in the session

‘Short gamma’ hedging amplifies volatility

Samsung Electronics to report second-quarter earnings on July 7

An earnings beat could restart the semiconductor rally

South Korea’s KOSPI slumped back into the 7,000 range for the first time in about a month. Asian stocks broadly fell after Meta’s move into cloud services cooled sentiment toward semiconductor shares, but the selloff in Seoul was far steeper. The market’s heavy concentration in Samsung Electronics and SK Hynix, coupled with single-stock leveraged products, appears to have magnified the drop.

Leveraged ETFs deepen the selloff

The KOSPI closed at 7,648.09 on July 2, down 7.89% from a day earlier. The benchmark returned to the 7,000 range for the first time in about 20 days and posted its lowest close since June 6, when it ended at 7,484.41.

A plunge in Samsung Electronics and SK Hynix, which had led the KOSPI rally, drove the index lower. Samsung Electronics fell 9.06% to close at 286,000 won. The stock finished below 300,000 won for the first time since June 11, snapping a 15-session run above that level. SK Hynix tumbled 14.57% to 2.1087 million won.

The sharp drop in the two chipmakers followed Meta’s announcement that it would launch a cloud business using surplus computing resources, raising concerns that semiconductor demand may be nearing a peak.

The KOSPI opened in the 7,000 range and later pared losses, briefly reclaiming 8,000 as some investors judged the Meta-related fears overdone. Late in the session, however, the decline abruptly accelerated, with losses widening to as much as 8.27%. Huh Jae-hwan, an analyst at Eugene Investment & Securities, said the stocks were hit brutally even though the development did not signal weakening demand for artificial intelligence.

Late-session rebalancing tied to single-stock leveraged trading appears to have worsened the slide. As Samsung Electronics and SK Hynix extended losses, asset managers offering single-stock leveraged exchange-traded funds and securities firms acting as liquidity providers sold cash equities and futures to maintain leverage ratios. The pattern resembled short-gamma hedging in the options market, where traders buy more of the underlying asset as prices rise and sell as prices fall, reinforcing the move and amplifying volatility.

On the day, single-stock leveraged products tied to SK Hynix fell by more than 30%, while those linked to Samsung Electronics dropped 18% to 19%.

Elsewhere in Asia, stocks also fell during similar trading hours, though declines were much smaller than in South Korea. Japan’s Nikkei 225 dropped 2.47%, while China’s Shanghai Composite lost 2.03% on July 2.

KOSPI shows heightened sensitivity to even small negatives

The market has seen five similar sharp selloffs over the past month. In each case, stocks reacted to news that could be interpreted negatively, and single-stock leveraged ETFs amplified the move.

A series of steep Friday and Monday declines after Broadcom’s earnings release in early June stands out. On June 3, Broadcom said in its earnings report that projected third-quarter AI chip sales would come in below market expectations. The selloff was triggered not by deteriorating earnings, but by concern that results might fail to deliver an upside surprise. The KOSPI plunged 5.54% on June 5, then dropped another 8.29% on June 8 as debate over whether semiconductor shares had peaked continued.

When the KOSPI tumbled 9.99% on June 23, the trigger again was not tied to the fundamentals of Korean companies. Profit-taking ahead of Micron’s earnings release and a parliamentary debate on taxing unrealized gains were seen as catalysts for the drop. Those losses were erased by a sharp rebound on June 24 and June 25 after Micron’s results confirmed resilient demand.

Market watchers say the reaction has been excessive. Whether sentiment recovers may hinge on Samsung Electronics’ earnings report. The company is due to release preliminary second-quarter results on July 7. SK Hynix will list American depositary receipts on the US market on July 10 and report preliminary earnings on July 29. If second-quarter results from Samsung Electronics and SK Hynix top expectations, the semiconductor-led rally could resume.

Kang Jin-kyu, Hankyung.com reporter josep@hankyung.com