Volatility on the Kospi falls, but so does trading ahead of Fed’s rate cut decision

Volatility on the Kospi has been roughly halved since late June, but the value of daily trading has also fallen to its lowest level of the year as investors burned in July's sharp sell-off stay on the sidelines ahead of the U.S. Federal Reserve's September rate decision.

The Kospi 200 Volatility Index, a gauge of market anxiety, had fallen to 44.09 as of 2 p.m. on Tuesday, roughly half the 96.94 posted on June 29, according to the Korea Exchange. 

The number of trading curbs, known locally as sidecars, that briefly halt program trading, dropped from 15 in July to five in August. Circuit breakers, which halt all trading, were triggered four times in July but not once in August. The calmer market reflects lighter mechanical selling pressure from single-stock leveraged products — funds that use rebalancing trades to deliver multiplied daily returns that can amplify price swings during periods of high volatility.

But the enthusiasm in the market has cooled along with the volatility. Average daily trading value on the Kospi fell to 25.77 trillion won ($18.8 billion) in August, the lowest of the year and about half of June's 50.35 trillion won. The turnover of listed shares slipped to just 0.54 percent. Investor deposits — cash sitting in brokerage accounts ready to be invested — fell from a record 139.69 trillion won on June 4 to 98.7 trillion won on Friday.

Investors who lost money in July's sell-off have been reluctant to trade aggressively, while persistently high long-term interest rates in the United States have fueled a wait-and-see approach ahead of the Fed's Federal Open Market Committee meeting in September. Korean investors, meanwhile, kept buying U.S. stocks, posting $1.96 billion in net purchases in August — the third straight month of net buying.

Foreign investors have yet to return after net selling 10.18 trillion won worth of Kospi shares in August.

"Foreign long-term investment funds have not reached a level of stability that would draw them back in earnest," Roh Dong-gil, an analyst at Shinhan Securities, said.

Still, foreign investors bought a net 14,246 Kospi 200 futures contracts last week.

"This suggests that some near-term downside concerns for the index have eased," said Lee Sang-yeon, a researcher at Shinyoung Securities.

Share buybacks helped cushion the market against foreign selling. Samsung Electronics and SK hynix together bought back 10.3 trillion won worth of their own shares between Aug. 20 and Friday, according to Shinhan Securities. Of that, 8.05 trillion won in purchases from Aug. 24 to Friday nearly matched the 8.32 trillion won foreign investors sold over the same period.

Despite the slowdown, some analysts caution against reading the drop in trading as a sign of a weaker market.

"While the Kospi rose 3.4 percent in August, the equal-weighted Kospi 200 index rose 10.8 percent and the Kosdaq rose 15.9 percent," said Han Ji-young, an analyst at Kiwoom Securities. "This wasn't a market where liquidity was concentrated in a handful of large-cap stocks — other sectors also responded to their own individual catalysts, creating a positive cycle of buying."

The question now is whether the lull in trading will give way to a prolonged sideways market.

"This month marks a phase where volatility and liquidity are normalizing and the initial rebound is broadening," Roh said. "A strategy centered on semiconductors, shipbuilding, insurance and energy — while confirming whether earnings are actually improving — remains valid."

BY PARK YU-MI [[email protected]]