The Eye of the Storm in the Global Chip Stock Crash: The "Various Ghost Stories" Behind the Plunge in Korean Stocks

A dramatic sell-off in the South Korean stock market is evolving into a storm sweeping the global semiconductor sector. This plunge is not simply caused by a deterioration of fundamentals, but is the result of technical overextension, slight adjustments to industry expectations, and a series of policy-related rumors creating overlapping panic.

On Tuesday, Korea Composite Stock Price Index (KOSPI), a major hub for global memory chips, plunged 10% in a single day and triggered a circuit breaker. Index heavyweights Samsung Electronics and SK Hynix both sank over 12%, together contributing more than 70% of the index’s decline. Panic quickly spread to global markets and directly affected the U.S. semiconductor supply chain, causing Micron Technology to close down 13% and Western Digital to fall 8.5% in a single day.

The immediate trigger for this sell-off frenzy was the resonance of a series of dense negative news.

Reports from South Korean media suggesting SK Hynix may slow the expansion of advanced AI memory chip production severely undermined market expectations for AI hardware demand. At the same time, domestic policy debates on taxing unrealized stock gains and regulatory warnings about overheating leveraged ETFs completely shattered the fragile market confidence.

Analysts point out that these extreme fluctuations are more driven by algorithmic mechanical selling, forced margin liquidation by retail leveraged funds, and institutional rebalancing, rather than sudden deterioration in fundamentals. Under multiple pressures, global investors are closely watching the upcoming Micron Technology earnings report to gauge the real prosperity and value support for the AI supply chain.

Ghost Story 1: Slowed HBM Expansion and Nvidia Order Cut Rumors

The direct cause for concern over fundamentals is marginal changes in high-end memory chip supply chain strategies.

WallstreetCN previously mentioned that SK Hynix is considering slowing the pace of ramping up production of sixth-generation high-bandwidth memory chips (HBM4), delaying some production line conversions, and reallocating resources toward general DRAM.

The logic behind this strategic adjustment lies in the reversal of product profit margins.

Currently, the profit margin of general DRAM is 15% higher than that of HBM, and Daishin Securities estimates that the operating profit margin for general DRAM could peak at 90% this year. Additionally, media reports citing insiders say Nvidia’s forecast for its next-generation "Rubin" chip production is being revised downward, causing speculation that tight HBM supply and surging AI demand expectations might be waning.

Such concerns are also confirmed at the macro industry chain level.

With hyperscale data center operators facing soaring capital expenditure and negative free cash flow expectations, the market is questioning whether these tech giants—the "source of funds"—will cut hardware procurement budgets, thus constraining revenue for storage, chips, networking, and server supply chains.

Ghost Story 2: Policy and Tax "Black Swan"—Unrealized Gains Tax Panic

Amid divergences in industry fundamentals, a discussion paper on tax reform sparked enormous panic in Korea.

According to Yonhap News, multi-party lawmakers held a tax reform forum advocating transforming "comprehensive income taxation," i.e., proposing to include unrealized gains (book value appreciation) from stocks and real estate into the tax system.

Although the proposal includes deferred taxation as a gradual path, for the highly-valued Korean stock market, it is undoubtedly a major negative. Experts warn that taxing only on asset realization produces a "freeze effect," but expectations to tax unrealized gains directly prompt investors to sell ahead of policy implementation.

In addition, Korea failed to enter the MSCI Developed Market (DM) watch list, and the President’s comments about "wealth effects" caused by stock volatility last week further intensified policy uncertainty.

Ghost Story 3: Leveraged ETF and "Negative Gamma" Backlash

From a quantitative and technical perspective, this plunge is a classic structural crash.

According to ZeroHedge, Nomura quantitative strategist Charlie McElligott pointed out that vast capital inflows into single-stock and memory-theme leveraged ETFs created massive "real and synthetic" negative gamma effects.

This market structure causes procyclical and mechanical capital flows—meaning the more the market falls, the heavier the selling. Charlie McElligott noted that during the sell-off, zero-dated (0-DTE) option traders aggressively shorted on rallies, completely destroying any attempted bottom fishing. Additionally, option dealers adjusting positions during the previous rally further aggravated the systemic downward spiral.

This effect means that as the market declines, market makers and ETF managers must mechanically sell more stocks to maintain risk exposure balance. Chris Cha, Goldman Sachs’ Korea high-touch trading director, disclosed in a report that local leveraged ETF scale has reached $9.1 billion, and offshore leveraged ETFs tracking SK Hynix and Samsung have reached $21 billion.

The shifting stance of Korea’s financial regulators further worsened the technical picture. The Financial Supervisory Service (FSS) director publicly expressed regret over failing to prevent the listing of single-stock leveraged ETFs linked to Samsung and SK Hynix, warning that their side effects are intensifying. Regulators are considering tightening margin lending and restricting ETF issuance, directly undermining technical buying that has supported the recent rally.

Ghost Story 4: Liquidity Exhaustion, Retail Liquidation, and Pension Funds Turned Sellers

The plunge revealed the extremely homogeneous buying structure of Korea’s stock market.

Alexander Redman, chief equity strategist at CLSA Singapore, pointed out that the rally was almost entirely retail-driven and disturbingly bubbly. This month, the margin balance for Korean retail investors rose to a record 38.5 trillion won (about $25 billion). Seoul fund manager Kim Namho noted that massive margin debt triggered forced liquidation in the afternoon, accelerating the market’s free fall.

Meanwhile, traditional stabilizers became the main sellers.

Goldman Sachs reported that, due to previous market surges, Korea National Pension Service (NPS) domestic stock holdings breached the 28.8% cap target. For rebalancing purposes, NPS recorded its largest net sale ($1.5 billion) in June since April 2021.

When pension funds shift from passive support to mechanical selling, together with overseas capital exiting, marginal liquidity in the market instantly dried up.

External Macro Pressure: Rate Cut Expectations Cool and Earnings Test Looms

As Korea’s domestic fundamentals and technicals reinforce downward movement, changes in the global macro environment also increased market fragility.

The unexpected resurgence of Fed rate hike expectations imposed systematic pressure on high-valuation tech stocks. Bank of America analyst Aditya Bhave predicts the Fed will resume rate hikes in September, October, and December this year, totaling 75 basis points, to address sticky service inflation and wage growth.

After extreme market turmoil, investors are focused on the impending Micron Technology earnings report. Goldman Sachs noted pre-earnings expectations for Micron have already been pushed to extremely high levels, incentivizing early profit-taking. Pepperstone Group strategist Dilin Wu said Micron’s results will be the true test of whether the AI hardware investment frenzy has lasting momentum.

As CLSA strategist Alexander Redman said, the amplitude of this volatility is closely linked to the retail-driven and bubbly nature of the market. Although the cyclical upturn of memory chips and the logic of AI demand have not been disproven in the medium term, chip stocks globally are undergoing a painful reset of expectations and digestion of valuations due to forced deleveraging and multiple rumors.

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