Sudden circuit breaker! A drop of over 1,400 points! Japanese and Korean stock markets crash

Korean and Japanese stock markets experienced heavy sell-offs.

Due to the ongoing escalation of tensions in the Middle East, both Korean and Japanese stock markets plummeted on Tuesday. The Korea Composite Index briefly dropped over 5%, triggering a circuit breaker during trading. The Korean financial markets were closed yesterday for a holiday. Prior to this, the Korean stock market had been soaring, with the index closing last Friday (before the Iran attack) up over 48% year-to-date, leading the global markets. Additionally, the Nikkei 225 index once plunged more than 1,400 points.

Analysts pointed out that, influenced by the escalating tensions in the Middle East, hedge funds that had previously heavily bought into Asian stocks are rushing to reassess their positions. Notably, foreign funds sold a net 6.8 trillion won (about 32.3 billion RMB) of Korea’s KOSPI index components last Friday, setting a single-day net selling record.

Regarding the Middle East situation, the latest news states that the Saudi Ministry of Defense announced on March 3rd that the U.S. Embassy in Saudi Arabia was attacked by drones. In response, President Trump said, “The U.S. will soon take retaliatory action.”

Plunge and Circuit Breaker

On March 3rd, the Korean stock market resumed trading after a sharp sell-off, with the KOSPI 200 futures index dropping 5% at one point, triggering a 5-minute pause in algorithmic trading. The Korea Composite Index also fell over 5%, activating the circuit breaker during trading.

Among major stocks, Korean Air and Hanmi Semiconductor dropped 9%, Kia Motors and Hyundai Motor fell over 8%, Samsung Electronics and SK Hynix declined more than 7%.

Defense stocks in Korea rose against the trend, with Hanwha Aerospace surging over 14%, LIG Nex1 up more than 26%, reaching the daily limit.

Prior to this, the Korean stock market had been on a relentless rally, with the Korea Composite Index breaking through 6,000 points. By last Friday’s close, it had gained over 48% year-to-date. Since hitting a low in April last year, the index has surged more than 173%, leading major global markets.

Meanwhile, the Japanese stock market continued to fall sharply. As of 12:30 Beijing time, the Nikkei 225 index dropped over 1,300 points, down 2.35%, and the Tokyo Stock Exchange Prime Index fell 2.61%. The previous trading day, the Nikkei 225 and the TSE Prime Index closed down 1.35% and 1.02%, respectively.

Analysts noted that, influenced by the ongoing escalation in Middle East tensions, hedge funds that had previously bought heavily into Asian stocks are hurriedly reassessing their positions. Among the stocks driving Korea’s rally, Samsung Electronics and SK Hynix face revaluation risks.

A senior executive at a large macro hedge fund told the Financial Times, “There is a lot of leverage in the system. (Funds betting on rising Asian stocks) have always been a very one-sided trade, and I think it will face significant challenges. This will impact the entire hedge fund industry.”

Goldman Sachs’s latest prime broker report covering the week until last Thursday shows that hedge funds’ exposure to emerging market stocks remains near five-year highs. The report added that, in dollar terms, betting on emerging markets was one of the most favored trades last week, with Korean stocks especially popular.

Some fund managers said that the turmoil in the Middle East has cast doubt on their plans.

Salman Ahmed, Global Macro Chief at Fidelity International, stated that “since Asian emerging economies rely heavily on oil imports, we are actively reviewing our emerging market exposures.” The asset management firm has been optimistic about this asset class at the start of the year and has built overweight positions.

According to data from the Korea Exchange last Friday, foreign funds sold a net 6.8 trillion won of Korea’s KOSPI index components during regular trading hours, setting a new single-day net selling record.

Escalating Middle East Tensions

A senior macro fund portfolio manager said that investors who increased their emerging market positions in recent months “need the conflict to end quickly.”

However, recent signs suggest that tensions in the Middle East are not cooling down. According to CCTV News, the Saudi Ministry of Defense announced on March 3rd that the U.S. Embassy in Saudi Arabia was attacked by drones, causing fires and partial damage to the building.

Two U.S. officials revealed that the U.S. embassy in Riyadh was attacked by two Iranian drones. U.S. officials said that, due to the attack occurring at night when fewer personnel were present, there have been no reports of casualties so far, but the threat to the embassy is still considered unresolved.

This is the second U.S. embassy targeted by similar attacks after the U.S. embassy in Kuwait was attacked by Iranian drones on March 2nd.

President Trump stated on March 2nd that “the U.S. will soon take retaliatory action” regarding the attack on the Saudi embassy.

Additionally, a senior U.S. official indicated that the U.S. is preparing to launch a “significant escalation” against Iran within the next 24 hours.

The official said that the U.S. believes the initial strikes have achieved the goal of weakening Iran’s defenses, and the next phase will focus on destroying Iran’s missile production facilities, drone capabilities, and naval forces.

Earlier in the day, Trump hinted at escalation in an interview, saying, “We haven’t even really hit them hard yet. Major actions are coming soon.”

(Source: Securities Times)