South Korea's KOSPI plunges nearly 10% after regulator cautions on leveraged ETFs

Samsung Electronics Co

Tue 08:39

By Cynthia Kim and Jihoon Lee

    SEOUL, June 23 (Reuters) - South Korea's KOSPI plummeted 9.99%, its steepest drop in more than three months, on Tuesday as overseas investors sold chipmakers following regulatory signals that the sector's rally had gotten overheated.
The benchmark KOSPI .KS11 closed down 910.71 points, its biggest daily plunge since March 4, at 8,203.84 points. 
Market bellwether Samsung Electronics Co. 005930.KS and peer SK Hynix 000660.KS shed more than 12% each, wiping out billions in market value and triggering an automatic 20-minute bourse-wide trading halt in the afternoon. 
The KOSPI index .KS11 has become increasingly dominated by the two chipmakers that now make up more than half of the market value, as they propelled the index past the historic 9,100-point level for the first time on Monday. 
Tuesday's pullback underscores the intensifying volatility of a market that critics worry has become dangerously overstretched, says Alexander Redman, chief equity strategist, CLSA.
"Volatility has blown out. (This kind of volatility) cannot be explained without heavy retail engagement," said Redman.
"What worries me is that retailers are in the driving seat, because they use a lot of margin, though the ratio to market cap is small. What is more worrying is that regulators have now allowed leveraged single security ETFs, pouring fuel onto the fire."
On Monday, the head of South Korea's market watchdog Lee Chan-jin said the government had been too hasty in approving leveraged funds tied to some of the country's best-known chip stocks, which were introduced last month and have contributed to heightened volatility.

     Regulators recently cautioned retail investors against the use of leverage on the KOSPI, as margin debt, or borrowing to buy stocks, rose to a record high in June. 
  
The KOSPI has risen 94.67% so far this year while the won has weakened 6.5% against the dollar.
In money and debt markets, September futures on three-year treasury bonds KTBc1 gained 0.14 point to 103.01.
The most liquid three-year Korean treasury bond yield KR3YT=RR fell by 3.1 basis points to 3.772%, while the benchmark 10-year yield KR10YT=RR fell by 1.8 bps to 4.179%.

(Reporting by Cynthia Kim; Editing by Harikrishnan Nair)
((Cynthia.Kim@thomsonreuters.com; 822 3704 5655; Reuters Messaging: cynthia.kim.thomsonreuters.com@reuters.net/))