South Korea's 'bipolar' stock market: meltdowns, a record rally and what's to come

South Korea's stock market experienced its sharpest reversal on record on Friday, following a month of erratic fluctuations. The Kospi index surged by 14%, marking its largest one-day gain, according to data from LSEG. SK Hynix and Samsung Electronics also saw record recoveries. Market commentator Jung In Yun noted that the Korean market has been swinging between panic and euphoria rapidly.

This dramatic turnaround followed a significant overnight rally in U.S. technology stocks, fueled by strong earnings from Microsoft, Amazon, and Meta, reinforcing the belief that spending on AI infrastructure remains solid. Support also came from SK Group Chairman Chey Tae-won's disclosed purchases of SK Hynix shares, bolstering confidence in the world's second-largest memory chipmaker.

International investors appeared to drive the rally, while short-covering and mechanical rebalancing by leveraged ETFs amplified the gains. New rules requiring deposits for leveraged ETF investors, effective July 31, might have influenced repositioning. Analysts expect more days like this, with asset prices becoming increasingly disconnected from fundamentals.

However, the immediate rebound could still have room to grow, as positioning had become extremely bearish and SK Hynix's AI-memory fundamentals remain robust. The real test will be whether foreign buying persists after today's short-covering fades. If it does, this could evolve into a more sustainable recovery. The recovery occurred just days after Korean equities suffered one of their worst sell-offs due to concerns over inflated AI valuations, rising leverage, and hints of forced liquidations in global semiconductor stocks.

Analysts view the latest rally as a reflection of confidence in the AI investment cycle's endurance rather than a fundamental shift. Recent forced selling appears to have largely subsided, and there are no indications of the AI infrastructure build-out slowing. While some remain skeptical that Friday's rebound signals the end of market turbulence, they caution against assuming risks surrounding the AI boom have vanished, warning that a larger correction may be imminent.