Samsung's "perfect" earnings report yet plunges 8%, South Korean stock market crashes 7% dragging down global markets, Nasdaq futures drop 0.9%, Yen hovers around 162 level.

South Korean stocks took a heavy hit on Tuesday. The KOSPI index plunged over 7% intraday before slightly rebounding, with losses narrowing to 6.6% as of the latest quote. Samsung Electronics' stock fell about 8% in a single day, while SK Hynix dropped over 7%. The selloff quickly spread outward—the MSCI Asia Pacific Index fell 1% to 272.78 points, and Nasdaq 100 futures losses widened to 0.9%.

The trigger for this wave of decline was Samsung Electronics' earnings release. The deeper source of turbulence is the concentrated unwinding of leveraged positions that had been accumulating in the South Korean market after the earnings announcement.

Samsung Earnings: The Better the Numbers, the Harder the Fall

Samsung Electronics' second-quarter operating profit surged 19 times year-on-year to 89.4 trillion won, exceeding the average analyst estimate of 84.2 trillion won; revenue doubled to 171 trillion won, also higher than the market forecast of 169.2 trillion won.

This growth was driven by strong demand for high-bandwidth memory from AI data centers. But before the earnings were released, the market had already priced them in. Prior to the earnings announcement, the U.S. chip stock index rose 2.2% yesterday, the S&P 500 rose 0.7%, and the Nasdaq 100 rose 1.3%. Good news was priced in, and funds took profits.

Leveraged ETFs: Pro-Cyclical Amplifiers

The reason for such a severe decline in South Korean stocks is that single-stock leveraged ETFs are a structural factor that cannot be ignored.

On May 27 this year, South Korean financial authorities approved the country's first batch of single-stock leveraged ETFs, launching 16 products linked to Samsung Electronics and SK Hynix. These products have daily gains and losses twice that of the underlying stocks. To maintain the target leverage ratio, they buy when the stock price rises and sell when it falls—which is inherently pro-cyclical.

The products became an instant hit upon launch. As reported by Wall Street News, the total trading volume of 14 leveraged ETFs in June alone reached 212 trillion won (approximately $138.6 billion), accounting for 26.6% of the total ETF trading volume during that period.

The Bank of Korea (BOK) issued a warning in a written response to opposition lawmaker Park Sung-hoon last Sunday, stating that the aforementioned leveraged ETFs "may reinforce one-sided trading behavior and further amplify market volatility when investors flood in or out; if stock prices experience a sharp decline, ETF redemptions and portfolio rebalancing will magnify retail investors' losses and trigger broader market turmoil."

This stance is significantly stronger than the wording in the central bank's June 24 Financial Stability Report—at that time, the BOK believed such products "help provide domestic alternatives, curb capital outflows, and attract foreign capital inflows into South Korea."

Lee Chan-jin, head of the Financial Supervisory Service, had previously stated publicly on June 22: "We pushed too hastily at the time. Looking back, I regret approving these products. Perhaps I should have done everything in my power to prevent their approval."

Shenwan Hongyuan Securities pointed out that historical patterns send a warning: during the peaks and subsequent sustained declines of the South Korean stock market in 2017 and 2021, the scale of leveraged ETFs actually continued to rise against the trend, which is highly similar to the current trend.

Japanese Government Bonds: Safe-Haven Funds Pour into Long-Term Bonds

In contrast to the stock market turmoil, Japan's long-term bond auction showed clear safe-haven demand.

On Tuesday, Japan auctioned 30-year government bonds, with a bid-to-cover ratio of 4.55, the highest since 2019 and well above the average of 3.41 over the past 12 months. Funds concentrated in long-term government bonds as the stock market came under pressure, indicating heightened risk aversion.

Meanwhile, according to CNBC, the yen came under pressure near 162, hovering near 40-year lows, and fell to 217.09 against the pound, the lowest since 2007. The market remains vigilant about whether Japanese authorities will intervene again, but so far there has been no sign of intervention.

MUFG Senior Currency Analyst Lee Hardman said: "Over the weekend, the market had expected Japan might intervene again during the low liquidity of the U.S. holiday, but authorities did not act, leading to some retracement of the yen's recent gains."

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