The global artificial intelligence trade cooled rapidly after a disappointing outlook from Broadcom, with South Korea's KOSPI index leading declines in the Asia-Pacific market on Thursday. This sudden move brought to the forefront the bubble risks that had been building due to highly concentrated chip stocks and rapidly expanding leveraged funds this year.
Nasdaq 100 index futures fell 0.5%, following a 14% plunge in Broadcom's after-hours trading. The company's latest performance outlook fell significantly short of investor expectations and signaled that its transition to AI customers is progressing slower than the market anticipated. UBS Group's AI Winners Basket index fell 1.4% on Wednesday, ending a four-day winning streak. The weakness in Asia extended the soft tone from Wall Street on Wednesday, where the S&P 500's nine-session winning streak came to a halt. Hawkish signals from Federal Reserve officials and renewed U.S.-Iran tensions further dampened risk appetite.
South Korea's finance minister, central bank governor, financial services commission chairman, and financial supervisory service chief held an emergency meeting, pledging to take "prompt measures" if necessary to respond to severe volatility in the foreign exchange market. Simultaneously, officials warned about stock financing loan balances hitting nearly a 20-year high, highlighting authorities' intense focus on market stability.
This market adjustment affected global assets: Bitcoin slid to around $64,000, its lowest level since February of this year; gold rose about 1% as bargain hunters stepped in; Brent crude oil fell about 1% to near $97 per barrel, ending a three-day rally on news of a ceasefire agreement between Israel and Lebanon; and European stocks were mixed as investors cautiously awaited the U.S. non-farm payrolls data on Friday.
Key Market Movements
European stocks opened with mixed performance. The Euro Stoxx 50 rose 0.13%, the UK's FTSE 100 fell 0.12%, France's CAC 40 gained 0.10%, and Germany's DAX increased 0.20%.
Japan's Nikkei 225 index closed down 1.4% at 67,470.69 points. The Topix index fell 1.1% to 3,951.85 points. South Korea's KOSPI index closed down 1.8% at 8,639.41 points.
The U.S. Dollar Index was largely unchanged.
The Japanese yen rose 0.1% to 159.86 per U.S. dollar.
The yield on the U.S. 10-year Treasury note fell two basis points to 4.48%.
Japan's 10-year yield rose three basis points to 2.670%.
WTI crude oil fell 0.8% to $95.27 per barrel.
Spot gold rose 1% to $4,479.64 per ounce.
Bitcoin fell 0.9% to $64,312.09.
Broadcom Warning Hits AI Sentiment
Broadcom's disappointing outlook triggered a broad sell-off in Asia-Pacific markets. The company's warning about a slower-than-expected AI transition, despite being on the right path, highlighted that market expectations had become excessive. The UBS AI Winners Basket index's decline ended its recent rally.
The weakness followed a poor session on Wall Street, where the S&P 500's long winning streak ended amid renewed Middle East tensions. European markets also faced downward pressure. Bitcoin fell to its lowest level in months, while Brent crude oil gave up recent gains. Gold found support from dip-buying.
South Korean Authorities Signal Readiness to Act
The sharp drop in the KOSPI, one of the worst performers in the region, prompted an emergency meeting among top Korean financial officials. While the index remains up significantly year-to-date and since mid-2025, the nearly 2% daily decline raised concerns.
Officials stated they are on high alert to prevent external uncertainties from triggering widespread market panic. They pledged to take immediate action if needed to counter excessive volatility. They linked recent market swings to the ongoing Middle East conflict and persistent foreign net selling in equities. The finance ministry noted that the market's rapid rise had led to temporary rebalancing and profit-taking by foreign investors, exacerbating volatility.
Officials emphasized Korea's strong economic fundamentals, including surging exports and a top-six global market capitalization ranking. However, they also warned about the potential risks from rising stock financing loans and pledged to monitor the situation closely to protect investors.
Concentrated Gains and Structural Risks
The KOSPI's strong performance masks severe concentration. Of its 835 constituents, fewer than half have risen this year. Samsung Electronics and SK Hynix have surged approximately 200% and 250%, respectively, each surpassing a $1 trillion market cap. Together, they account for over 40% of the KOSPI's weight, while the remaining 800-plus stocks contribute less than 30% to the index's gain.
Parallel to this concentration is a rapid expansion in leveraged speculative funds. Data shows margin loan balances at Korea's top ten brokerages nearly doubled year-over-year to near 36 trillion won, a 20-year high. Investors aged 50 and above account for 62.3% of this, with those over 60 seeing their loan balances surge. Notably, new securities accounts opened by those under 18 soared nearly tenfold in Q1 2026 compared to a year earlier.
Market data indicates the number of temporary trading halts triggered on the main board this year is at its highest since the 2008 financial crisis, highlighting extreme volatility.
Wall Street Divided, Bubble Warnings Emerge
Wall Street firms are split on the KOSPI's rapid ascent. Goldman Sachs raised its target for the index, suggesting the AI chip stock rally could continue but acknowledging rising correction risks. The firm expressed greater optimism for North Asia due to its strong earnings growth.
Citigroup warned that Korean equity valuations are high globally and, combined with structural labor risks, could dampen long-term foreign investment appetite, viewing the rally as more driven by short-term sentiment. Standard Chartered's global chief investment officer noted that being long Korea has become a "highly crowded trade" and downgraded the semiconductor sector, stating a near-term pullback would be reasonable.
Billionaire and Bridgewater Associates founder Ray Dalio commented that all great technological revolutions create bubbles. Emerging markets investor Rob Marshall Lee was more direct, calling the Korean market a "massive bubble." He pointed to low return on equity for most Korean firms, a situation unlikely to change fundamentally in the AI era, and warned of a potential sharp profit margin collapse when the cycle turns.
Fed Hawkishness Adds to Macro Pressures
Hawkish comments from Federal Reserve officials added to the market's cautious mood. Dallas Fed President Lorie Logan suggested policymakers might need to raise rates later this year to bring inflation back to target, while New York Fed President John Williams noted ongoing uncertainty about the rate path.
Recent data showing the largest increase in U.S. corporate employment since early 2025 indicates resilient hiring. If confirmed by Friday's jobs report, expectations for Fed rate hikes could strengthen. The 10-year Treasury yield dipped slightly. Investors are also awaiting weekly jobless claims data for further clues on the labor market.
Analysts noted that persistently strong U.S. economic data could lead investors to bet on a stronger dollar, particularly against low-yielding assets like the yen and gold. Separately, reports suggest the Bank of Japan is considering a 25-basis-point rate hike this month, with potential for further hikes this year, supporting the yen's strength against the dollar on Thursday.
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