Kospi Panic Deepens After First Back-to-Back Circuit Breakers as July Loss Reaches 28.9%

First-Ever Circuit Breakers on Two Straight Days

Investors Reeling From a Monthly Drop Worse Than During the IMF Crisis

Investors Ask How Much Further It Can Fall

South Korea’s stock market plunged deeper into panic on July 29 after a circuit breaker, which halts trading for 20 minutes, was triggered for a second straight session for the first time on record. Brokerages attributed the surge in volatility to a combination of single-stock leveraged exchange-traded funds, concern over China’s semiconductor sector and worries about a slowdown in global artificial intelligence investment. With no clear way to gauge the market’s true bottom, investor anxiety has reached an extreme.

Epic AI, an AI-based investment information platform, said the Kospi closed down 5.98% from the previous session at 5,663.24. The benchmark fell as low as 5,262.77 intraday after another circuit breaker was triggered, before trimming losses late in the session. It was the first time in the history of South Korea’s stock market that circuit breakers were activated on two consecutive days.

As of July 28, the Kospi had already logged a monthly drop of 28.9%, the steepest on record. That surpassed the previous record decline of 27% in October 1997. The comparison has shocked Seoul’s brokerage industry because the earlier collapse came when the economy was nearing breakdown and South Korea was forced to seek an International Monetary Fund bailout.

Market participants have largely blamed the Kospi’s sharp decline on single-stock leveraged ETFs tied to Samsung Electronics and SK Hynix, products introduced by the government in late May. The cabinet approved the measure on April 21, and the implementing decree was promulgated on April 28, a week later. On May 27, 16 ETFs and two exchange-traded notes tied to Samsung Electronics and SK Hynix were listed simultaneously.

The government has since rolled out related measures, but they appear to have had little effect on sentiment after risk appetite had already caught fire. From July 1 through July 29, retail investors were net buyers of 1.1584 trillion won of KODEX Leverage.

On July 28, when the Kospi tumbled more than 10%, retail investors bought leveraged ETFs heavily. That buying continued on July 29 even as the Kospi dropped as much as 12% intraday. Individuals were net buyers of 266 billion won of KODEX Leverage and 64.8 billion won of KODEX 200.

Brokerages say the recent jump in stock-market volatility has sharply increased losses on leveraged ETF investments. Mohamed Apabhai, head of Asia-Pacific trading strategy at Citi Global Markets, estimated in a market commentary for institutional investors that cumulative losses for retail investors in leveraged ETFs tied to Korean assets had reached about $38.7 billion.

With the Kospi extending its plunge after the previous day’s rout, fear over the market’s true bottom is spreading. As recently as last week, investors were looking for a rebound around 6,800. In just two days, however, the index has shed more than 1,000 points, leaving traders scrambling to find a new support level in the 5,000 range.

Goldman Sachs identified 6,800 on the Kospi as the key technical support level and pointed to mechanical selling from single-stock leveraged ETFs tied to Samsung Electronics and SK Hynix as a central problem. If that level fails, the next support is 6,500, according to the bank. A break below that could push the index down to 6,100 to 6,000. Morgan Stanley said in a recent report that it expects the Kospi to trade in a 6,000 to 9,000 range over the next three to six months, and many local strategists had also viewed 6,000 as the floor.

Even so, the index has now broken below 6,000 and is searching for a new bottom. Market participants cite anxiety over the strong Shanghai listing debut of Chinese memory-chip maker CXMT, along with concern about deep ultraviolet lithography equipment being developed by Chinese state-owned companies. They also point to a severe erosion in the underlying strength of the Korean stock market. Circuit breakers were triggered six times across the Kospi and Kosdaq in July alone, an extraordinarily volatile stretch that has crushed investor sentiment.

Kim Yong-gu, an analyst at Yuanta Securities, said companies’ growth prospects and earnings remain solid, but vague market anxiety continues to weigh on sentiment and leave stocks unable to regain momentum. Good earnings and corporate value alone are not enough to halt the decline, he added.

Han Ji-young, an analyst at Kiwoom Securities, said the bigger question now is whether investors should sell and close out stock positions or hold on and wait for a rebound, with the trend so badly distorted that the Kospi has broken below 6,000 intraday.

Kang Kyung-ju, Hankyung.com reporter qurasoha@hankyung.com