Leverage ETFs Deepen Meta Shock in Kospi Selloff; Samsung Earnings Seen as Next Market Test

South Korean stocks sink 7.89%; Japan drops 2.47%, China 2.03%

Asset managers sold stocks and futures late in the session

‘Short-gamma’ hedging amplified volatility

Samsung Electronics to report second-quarter earnings on July 7

Chip rally may resume if results beat estimates

South Korea’s Kospi plunged back into the 7,000 range for the first time in about a month. Asian equities broadly declined after news of Meta’s move into cloud computing cooled sentiment toward semiconductor shares, but the Kospi’s drop was notably steeper than elsewhere in the region. The market’s heavy concentration in Samsung Electronics and SK Hynix, along with single-stock leveraged products, appears to have amplified the selloff.

Leverage ETFs widened the decline

The Kospi closed at 7,648.09 on July 2, down 7.89% from a day earlier. It was the index’s first return to the 7,000 range in about 20 days and its lowest close since June 6, when it ended at 7,484.41.

The slide was driven mainly by Samsung Electronics and SK Hynix, which had led the index higher. Samsung Electronics fell 9.06% to close at 286,000 won. It was the first close below 300,000 won since June 11, ending a 15-session stretch above that level. SK Hynix tumbled 14.57% to 2.1087 million won.

The two chipmakers sold off after Meta said 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, then trimmed losses and briefly reclaimed 8,000 as some investors argued concerns tied to Meta were overdone. Late in the session, however, the decline abruptly accelerated, with the loss widening to as much as 8.27%. Heo Jae-hwan, an analyst at Eugene Investment & Securities, said related shares were hit mercilessly even though the development did not signal weaker demand for artificial intelligence.

Late-session rebalancing tied to single-stock leveraged trades appears to have added to the drop. As Samsung Electronics and SK Hynix sank, asset managers offering single-stock leveraged exchange-traded funds and brokerage firms acting as liquidity providers sold stocks and futures to maintain leverage ratios, magnifying the decline. 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 market direction and increasing volatility.

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

Other Asian markets also declined during similar trading hours, though their losses were far smaller than South Korea’s. Japan’s Nikkei 225 fell 2.47% on July 2, while China’s Shanghai Composite dropped 2.03%.

Kospi increasingly sensitive to even minor negatives

There have been five similar sharp drops over the past month. In each case, the market reacted to an issue that could be interpreted negatively, and single-stock leveraged ETFs appeared to magnify the move.

The clearest examples came in the back-to-back Friday and Monday selloffs after Broadcom’s earnings report in early June. On June 3, Broadcom forecast third-quarter AI semiconductor sales below market expectations. Heavy liquidation followed, not because earnings had deteriorated, but because investors feared the company might fail to clear elevated expectations. The Kospi then plunged 5.54% on June 5. It fell another 8.29% on June 8 as debate over a peak in semiconductor shares continued.

When the Kospi slumped 9.99% on June 23, the trigger again was not tied to domestic corporate fundamentals. Profit-taking ahead of Micron’s earnings and a parliamentary forum on taxing unrealized gains were seen as catalysts for the selloff. Those losses were later recouped in sharp gains on June 24 and June 25 after Micron’s results confirmed solid demand.

Experts see the market’s reaction as excessive. Whether sentiment recovers now hinges on Samsung Electronics’ earnings. Samsung is due to release preliminary second-quarter results on July 7. SK Hynix will then 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, a semiconductor-led rally could resume.

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