NextFin News, Hong Kong -- Asian markets plummeted for a third consecutive day on Wednesday, driven by mounting tensions in the Middle East and concerns over rising inflation, as fears of a delayed U.S. Fed rate cut and soaring oil prices continued to weigh on investor sentiment.
South Korea's stock market was at the epicenter of the turmoil, with Kosdaq Composite index crashing 14% to 978.44 and benchmark index KOSPI plummetting 12.06% to 5093.54 at close, marking their worst single-day performance in decades.
The sell-off, fueled by a renewed surge in oil prices and a stronger U.S. dollar, deepened as concerns over geopolitical instabilit in the Middle East drove investors to rapidly unwind risky positions accumulated amid the AI-led market rally.
After an 8% drop on Wednesday, the Kosdaq, South Korea’s tech-heavy index, triggered a 20-minute trading halt after hitting its daily limit. The broad-based sell-off showed no signs of abating, with the KOSPI's losses widening further to 12.06% by the end of the session. In total, the South Korean market has tumbled 20% in just two days, wiping out all gains made in February.
Asia's Struggles Amid Oil Price Surge
The broader Asia-Pacific region also saw sharp declines, with Japan’s Nikkei 225 falling by 4.3%, and the MSCI Asia-Pacific Index slumping as much as 4.5%. Thailand’s SET Index plunged by 8%, triggering a temporary suspension of trading in the country’s equity market. The Thai Futures Exchange (TFEX) suspended trading in index futures, index options, and single-stock futures in response to the volatility.
Oil prices soared for the third consecutive day, with Brent crude rising another 1.6% to hover above $82 per barrel. The surge, coupled with a 0.2% rise in the U.S. Dollar Index, which hit its largest two-day gain in almost a year, has exacerbated fears of rising inflation across the region. The spike in crude oil prices has fueled concerns that inflationary pressures will delay the Fed's expected interest rate cuts, which in turn has spooked investors in high-growth technology and semiconductor stocks that had benefited from an AI-led rally.
The heightened uncertainty over oil prices and inflation was underscored by a report from Bloomberg, which cited U.S. President Donlad Trump's announcement that the U.S. would escort and insure ships passing through the Strait of Hormuz. European stock futures showed some signs of recovery, with the Stoxx 50 futures rising by 1%, and S&P 500 futures narrowing their losses.
The Fallout: A Dismal Day for Tech Stocks
Asia's vulnerability to the closure of the Strait of Hormuz was laid bare as foreign investors rapidly withdrew from riskier markets like South Korea. According to Christopher Forbes, head of CMC Markets Asia and the Middle East, the market was almost devoid of buying interest after the announcement of a joint U.S.-Israel operation in the Strait, with foreign capital pulling out over $7 billion in just two days.
The rapid sell-off was particularly concentrated in large-cap technology stocks, including South Korean semiconductor giants Samsung Electronics and SK Hynix, which together account for nearly 50% of the KOSPI index weight. Both stocks plunged 10% on Thursday, a significant drop that analysts attributed partly to profit-taking in the face of rising geopolitical risks, as well as growing fears of a slowdown in AI-related data center investments.
The sell-off has brought forward concerns about Korea’s market concentration, with Lorraine Tan, Director of Asia Equity Research at Morningstar, noting that the high concentration of large-cap stocks in the index, particularly in the technology sector, leaves the market vulnerable to sharp fluctuations.
Tareck Horchani, head of Maybank Securities' commodity brokerage division in Singapore, commented that the massive sell-off resembled a “position unwinding and risk reduction,” rather than a reflection of fundamental deterioration in the underlying tech sector. He explained that rising oil prices and increased volatility in the forex market often prompt investors to retreat to safer, more liquid stocks.
A Long Road to Recovery
Despite the heavy losses, some market participants are beginning to see potential for a rebound, particularly if the geopolitical situation stabilizes. Christopher Forbes cited data from Goldman Sachs indicating a historically high short-to-long ratio in the market, with bears outnumbering bulls 2-to-1 as of early February. “If tensions ease quickly, we could see a sharp short squeeze that may provide some upside, especially for stocks like Samsung and SK Hynix,” he said.
However, many analysts are cautioning that a true market recovery will require a clear de-escalation in Middle East tensions. “Given the extremely bullish positioning prior to this correction, a normalization process is needed, and geopolitical events are notoriously hard to predict,” said Rupal Agarwal, a quantitative strategist at Bernstein.
NLI Research Institute’s chief equity strategist, Shingo Ide, also cautioned that the market may be in for a prolonged period of uncertainty. “The high expectations of policy support and double-digit profit growth for next year in Japan are now being questioned,” he said, adding that unless oil prices stabilize, the Japanese market could struggle to regain momentum.
Toxic Cocktail
A key difference in this sell-off, compared to previous market corrections, is that the old pattern of "buying the dip" may no longer be the case. Historically, Trump’s unpredictable foreign policy moves, such as "Liberation Day" tariffs or threats of invasion into Greenland, were seen as temporary disturbances, leading traders to quickly buy back into the market once the turmoil subsided—a pattern traders dubbed “TACO trade” (Trump Always Chickens Out).
However, as Hebe Chen, Senior Market Analyst at Vantage Global Prime, pointed out, the current crisis is different. This is no longer a trade dispute or tariff talk. We’re dealing with unpredictable warfare and geopolitical instability, which makes it harder for markets to price in future outcomes, she said.
The market is now facing a "toxic cocktail" of soaring energy prices, a resurgent U.S. dollar, and escalating geopolitical tensions that are testing investor confidence and pushing stocks into a deeper correction
As investors brace for further volatility, the question remains whether Asia's markets can stabilize in the face of mounting risks, or if the worst is yet to come. With geopolitical tensions lingering and inflationary pressures mounting, it’s uncertain how much longer the sell-off will last or what might spark a rebound.
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