South Korean stocks fell sharply in early trading on Friday, with the Kospi dropping more than 6% at one point, triggering a circuit breaker. The market pullback was mainly driven by weakness in AI chip stocks, overshadowing a potential recovery in risk appetite due to a possible diplomatic easing of tensions in the Middle East.
The decline in heavyweight stocks dragged down the overall market.
As of press time, SK Hynix was down about 9%, the Nikkei 225 was down nearly 2%, and Nasdaq futures were down nearly 1%. The Korea Exchange triggered a circuit breaker after Kospi 200 futures fell 5%, suspending algorithmic trading for 5 minutes.
The South Korean stock market had previously seen a strong rally, but the gains were highly concentrated. The report, citing data from the Korea Exchange, stated that the Kospi index has risen by over 100% this year. However, while the index hit a new high this week, only 2.6% of its constituent stocks reached 52-week highs, while 31% of stocks fell to 52-week lows during the same period.
This means that the index performance is mainly supported by a few heavyweight stocks, especially Samsung Electronics and SK Hynix. The two companies together account for 54% of the Kospi's total market capitalization and have contributed nearly three-quarters of the index's gains this year.
Leveraged funds amplify volatility
Market concerns stem not only from the concentration of weighting in ETFs but also from the rapid rise in leveraged trading. Leveraged ETFs linked to Samsung Electronics and SK Hynix have seen active trading. Exchange data shows that in the first five trading days after their listing on May 27, the four most active related ETFs accounted for 21% of the total trading volume of all ETFs in South Korea.
Some industry insiders point out that these types of products may continue to drive up buying interest when prices rise, and amplify selling pressure when prices fall, making it easier for the market to experience a rapid reversal.
Meanwhile, retail investors' willingness to add new funds has cooled. Data from the Korea Financial Investment Association shows that brokerage deposits fell from 137 trillion won on May 12 to 121 trillion won on May 22; while margin balances rose to a record 38 trillion won on May 29, higher than the 27.3 trillion won at the end of 2025.
The expectation of a July rate hike is the next source of pressure.
The market is also watching the impact of a potential interest rate hike by the Bank of Korea next month. If financing costs rise, transactions reliant on borrowed funds could face greater pressure, and liquidity could tighten.
However, optimistic expectations have not completely disappeared. Demand for AI-related chips remains strong, and some Wall Street institutions continue to raise their target prices for the South Korean stock market. Goldman Sachs has already raised its Kospi target from 9,000 points to 12,000 points this week.
The core problem in the current market is that the index's rise is overly reliant on a few leading AI companies. When heavyweight stocks pull back, leveraged funds crowd out, and interest rate expectations coincide, short-term volatility in the South Korean stock market is more easily amplified.
