An electronic trading board shows the KOSPI closing at 2,441.55 points, down 8.77 percent from the previous session, at a KB Kookmin Bank dealing room in Seoul, Monday. Yonhap

The Korea Composite Stock Price Index (KOSPI) tumbled 8.77 percent from the previous session to close at 2,441.55 points, Monday, the steepest decline in closing price to date. The tech-heavy Kosdaq ended at 691.28 points, down 11.3 percent.

Both the KOSPI and Kosdaq experienced a "circuit breaker," a government-mandated 20-minute halt in trading activated when the local index falls or rises by at least 8 percent from the previous session. The halt coincided with the KOSPI crashing to a midday low of 2,386.96 points. The near 11 percent drop was a further sharp fall from Friday's drop of 3.65 percent.

The circuit breaker was an escalation from a "side car," a less stringent trading curb of a five-minute trading suspension. It is triggered when the KOSPI 200 futures experience a loss or gain of at least 5 percent for one minute or longer, or when the Kosdaq index sees a fall or gain of at least 6 percent for one minute or longer.

Large-cap Samsung Electronics and SK Hynix shares both saw intraday losses of over 10 percent, a significant drop from their respective previous highs of 88,800 won and 248,500 won in mid-July.

Propelling the plunge over the two sessions were fears of a U.S. recession, as highlighted and advanced by the "Sahm Rule" on the heels of July jobs data, Friday (local time).

Developed by renowned economist Claudia Sahm, the rule posits that a significant and sustained increase in the unemployment rate is a reliable early indicator of economic downturns. She has since ruled out the possibility of a recession over the weekend, but market jitters persisted into the following sessions. Tokyo's benchmark Nikkei 225 index plummited to 31,458.42 points, the same day. The 12.4 percent intrday drop was the largest in its history.

Also contributing to the downturn was the overvaluation of artificial intelligence (AI) stocks on a multi-month bullish streak, as evidenced by the so-called Magnificent 7 — Microsoft, Apple, Alphabet, Amazon, Nvidia, Meta, and Tesla — registering a combined loss of $2.6 trillion in market capitalization over the past three weeks. These mega-cap shares experienced individual market cap losses ranging from 9 percent to 23 percent.

Further drop contained?

“Any steep further plunge comparable to today's developments will be limited,” said Eric Lee, a researcher at Daishin Securities.

The index, however, will continue a moderate- to significant fluctuation throughout the week into the next, gripped by fear.

“The investor sentiment will be dominated by a heightened sense of fear and uncertainty, leading to extended unwarranted volatility. It will take some time before the investor confidence is regained.”

Joining the rush of selloff at diving prices is not recommended, albeit understandable, he added.

“It is hard to be patient when a significant portion of your cash is evaporating in a matter of minutes or seconds,” he said. “The fear is about losing the entire investment. It is up to individual investors, but letting an acute sense of panic drive the decision may not always guarantee a desired return.”

Kiwoom Securities analyst Kim Yu-mi said the U.S. labor market weakening is not an imminent fear factor, as mitigated by other market indices and market supply and demand conditions factoring in immigration populations.

“The U.S. nonfarm payrolls and jobless rate hitting a 34-month high of 4.3 percent definitely undershoot market expectations, but to identify a direct causal link between the weak market print and a full-fledged recession is a somewhat overblown,” she said.

The much-debated "Sahm Rule" in that sense was an indicator that can point only to an onset of a recession, in her view, not a conclusive overwhelming sign of a full-blown recession.

The rule says “The economy has tipped into a recession if the jobless rate based on a three-month average is a half percentage point above its lowest point over the previous 12 months.”

Friday's jobs report technically fits into the broader premises of the rule, in her view, but falls short of other qualifiers to be fully applicable. The U.S. household income, consumer spending and business investment are robust.

The Korean equity market will have to brace for additional tumbles, and short-term gains from selloff amid constrained sentiment is therefore diminished, she added.

“Increase in holdings in selective shares to benefit from global monetary easing will be a better choice.”

Stepped up monitoring

Deputy Prime Minister and Finance Minister Choi Sang-mok called for a team of finance ministry and Bank of Korea officials to fortify monitoring of financial market developments, as part of a contingency plan.

“The extended volatility in the market has been amplified due to fears of a U.S. recession and the geopolitical escalation in the Middle East. Agencies and authorities should maintain close coordination in an around-the-clock monitoring for swift response measures.”

The Korean currency traded at 1,374.8 won against the U.S. dollar as of 3:30 p.m., down 3.6 won from the previous session.