Kospi volatility continues with drop of 4.5% on renewed concerns of military conflict in Iran

The Kospi fell 4.52 percent to close at 7,730.82 on Wednesday as renewed concerns over a potential military confrontation between the United States and Iran and overnight losses on Wall Street rattled investors, extending a week of extreme market volatility.

A sell-side sidecar, which temporarily suspends program sell orders, was triggered at 1:16 p.m. on Wednesday after Kospi 200 futures dropped more than 5 percent. The market has been experiencing extreme vacillation, with buy and sell-side sidecars activated every trading day during the second week of June.

Foreign investors were net sellers of Kospi stocks, unloading 2.81 trillion won ($1.84 billion) worth of shares on Wednesday, according to the Korea Exchange. The selling streak has now extended to 23 consecutive trading sessions, with cumulative net sales reaching 74 trillion won.

The V Kospi, often referred to as Korea's fear gauge, hit 89.17 during intraday trading after reaching a record high of 91.23 the previous day.

Securities firms have attributed the increase in volatility partly to single-stock leveraged exchange-traded funds (ETF) tied to Samsung Electronics and SK hynix, launched on May 27.

Samsung Electronics fell 6.06 percent to 302,500 won, while SK hynix declined 7.54 percent to 2.05 million won.

Single-stock leveraged ETFs linked to the two chipmakers fell between 32 percent and 36 percent over the past week, according to market tracker Koscom ETF Check, and posted steeper losses than the underlying shares.

Leveraged ETFs are designed to deliver twice the daily return of an underlying asset. In volatile markets where declines and rebounds occur repeatedly, investors can still suffer losses even if the underlying asset returns to its original level due to what is known as the negative compounding effect.

Bloomberg reported Wednesday that the "number of bearish options tied to South Korea’s Kospi 200 Index has climbed so sharply relative to bullish wagers."

As of Monday, trading volume in protective put options on the Kospi 200 outpaced call options by two and a half times, reflecting expectations of gains. The ratio reached its highest level in five years.

When the put-call ratio exceeded two and a half times in July 2007, the Kospi 200 fell nearly 17 percent the following month. After the ratio surpassed that level again in January 2021, the index slid more than 5 percent over the next three weeks.

“The put-call ratio is offering one more indication of a cooling in the global momentum trade, in which Korea participated heavily,” Arun Singhal, the chief executive officer at Indicus Capital, told Bloomberg. “It makes sense to hedge and protect gains even at these levels, especially as interest-rate and inflation expectations are being repriced.”

In the regular foreign exchange market, the won weakened by 12.1 won from the previous session against the dollar to trade at 1,524.2 won.

“The weakening won has eased somewhat, but that wasn't driven by natural market demand and supply, and it is too early to say the trend has reversed,” said Baek Seok-hyun, a researcher at Shinhan Bank.

“Several important events are approaching, including the listing of SpaceX on Friday and the first Federal Open Market Committee meeting under new Chair Kevin Warsh on June 17,” Baek added.

BY PARK YU-MI, LEE HEE-KWON [[email protected]]