Global banks are curbing hedge funds' leveraged bets on Asia's top chipmakers including SK Hynix Inc. and Samsung Electronics Co. after a blistering rally this year raised concerns of a potential pullback. According to Bloomberg, brokers including Citigroup Inc., JPMorgan Chase & Co. and Goldman Sachs Group Inc. have raised financing costs for hedge funds to take bullish wagers on SK Hynix and Samsung Electronics shares via swaps. Swap financing rates have been increased to a range from 300 basis points to as much as 11% over the secured overnight financing rate (SOFR), with the new rates translating into nearly 15% at the top end of the range. This compares with financing rates between around 100 and 200 basis points above SOFR in early May. Morgan Stanley is turning away clients seeking new swap trades in the two Korean stocks, while some second-tier banks have also stopped accepting additional orders in the past two weeks. Bank of America Corp., BNP Paribas and UBS Group AG are also lifting financing costs and restricting the size of swap trades in the two stocks.
South Korea's KOSPI has recorded a sharp market decline after emergency circuit breakers halted trading twice in one week - triggering full halts on June 8 and June 10 that stopped trading for 20 minutes each. According to Bull Theory, the KOSPI has recorded only ten full circuit breakers in its entire history, making the recent occurrence extremely rare. The index fell 13% across eight trading days, with the pace of decline bringing renewed focus to South Korea's equity market structure. The KOSPI 200 put-call ratio reached 2.5, its highest level in five years, with this reading appearing only twice in 20 years - previously in July 2007 before a 17% decline and January 2021 before a 5% drop. Latest data shows the KOSPI 200 volatility gauge surged past 90 for the first time Tuesday, setting a record high as the market continues to experience intense volatility.
The market decline has intensified pressure on retail traders with large margin positions, as forced stock sales from margin calls reached about 300 billion won - equivalent to approximately $197 million based on conversion rates. According to Global Markets Investor, this figure represents the largest reading on record. Retail margin debt now stands near 38 trillion won, or about $24.9 billion, leaving leveraged traders exposed during fast market moves. The high debt levels have amplified the impact of recent volatility, with the KOSPI 200 volatility index moving above 90 on Tuesday - reaching its highest level on record. 166 billion won of stock margin loans were forcibly liquidated on Friday, the highest in at least six months, as reported by the Korea Financial Investment Association. Program trading stopped on Monday and Wednesday to slow automated selling, while the index experienced dramatic swings including 8.3% decline on Monday, 8.2% rebound on Tuesday, and 4.5% drop on Wednesday.
The recent market decline has been exacerbated by an AI-unwinding trade that has intensified fears that the surge may have been overblown. Despite the KOSPI emerging as the world's top-performing stock index this year with a 76% gain, the benchmark has now plunged 9% over two sessions as investors book profits in AI-driven semiconductor stocks. SK Hynix's shares have more than tripled this year, while Samsung Electronics is up over 175%, helping Korea's benchmark Kospi Index jump around 100%. SK Hynix and Samsung Electronics between them now represent around 53% of Korea's benchmark Kospi Index - more than double their combined weight five years ago. Demand for AI infrastructure has surged over the past year as technology companies worldwide race to develop advanced AI models and expand computing capacity, prompting investors to pour money into South Korean chipmakers that occupy a key position in the global AI supply chain. However, the KOSPI 200 volatility gauge climbed above 90 for the first time on Tuesday, setting a new record as options activity also flashed warning signs with the ratio between protective puts and bullish calls approaching 2.5 times.
U.S. consumer inflation increased at its fastest pace in three years in May, with the Consumer Price Index rising 4.2% in the 12 months through May - the largest gain since April 2023. The CPI advanced 3.8% year-on-year in April, with prices increasing 0.5% on a monthly basis after climbing 0.6% in April. Inflation outpaced wage growth for a second consecutive month, which could weigh on overall economic growth. Additionally, renewed tensions in the Middle East have added to market fears, with Iran announcing the closure of the Strait of Hormuz after the U.S. military began fresh strikes on multiple targets inside Iran on Wednesday. The latest escalation marks the latest development in a conflict that had been largely on hold since early April, when both sides agreed to a fragile ceasefire.
The turmoil has spread across Asia and removed hundreds of billions from regional markets, with the KOSPI's decline now shaping current market stress through institutional hedging, retail liquidations, and index concentration. Chaiwon Lee, chair of Life Asset Management, attributed the overshoot to single-stock leveraged exchange-traded funds tracking Samsung and SK Hynix, which amplify market moves and contribute to increased volatility. 'The market is likely to take a breather for the time being,' he said, citing upcoming catalysts including US inflation data, a Federal Reserve meeting, and the SpaceX listing on June 11. Arjun Jayaraman, a portfolio manager at Causeway Capital Management, noted that 'There's been a lot of very speculative, leveraged money coming into the Korean market' and warned that 'Really, leverage is the bottom line here'. 'Volatility in Korea will stay higher than historical levels, driven by leveraged ETFs and increased retail participation through margin loans,' he said, as investors were also reluctant to make large bets ahead of Wednesday's US inflation report. Mega-IPOs including SpaceX's $75 billion listing this week are also expected to tie up bank balance sheets, giving banks more incentive to control the amount of capital they deploy to trades in SK Hynix and Samsung Electronics.
