Global markets witnessed a broad sell-off of risk assets on Tuesday.
South Korea's KOSPI index plummeted 10%, triggering a trading halt, while Nasdaq 100 futures fell more than 2.5%. European technology and semiconductor stocks faced widespread pressure, and gold, silver, copper, and crude oil prices all declined simultaneously. In stark contrast, the US dollar and US Treasury bonds were among the few assets to rise.
On the surface, a South Korean policy discussion paper concerning capital gains taxation appeared to ignite the market sell-off. However, the deeper catalyst is the rapidly intensifying expectations for interest rate hikes by the US Federal Reserve. As major Wall Street institutions, including Bank of America, collectively revised their inflation and interest rate forecasts upwards, the low-interest-rate narrative that has supported the AI-driven bull market over the past two years is now being challenged. High-valuation technology stocks are bearing the initial brunt of this shift.
The market is now reassessing a critical question: if the AI investment cycle continues but the cost of capital rises again, can current valuations still be justified?
South Korean Market Leads the Sell-Off
During Tuesday's Asian trading session, the South Korean stock market was the first to falter. A discussion paper on incorporating unrealized gains from stocks and real estate into a comprehensive tax system circulated, triggering panic selling among investors.
According to earlier reports cited by financial media, a multi-party forum of South Korean lawmakers, including members from the Democratic Party, the Justice Party, and the Social Democratic Party, was held on the morning of June 23rd. The forum's core proposal was to push for a transition to a "comprehensive income tax system" where taxes would be levied on the substantive increase in net asset value, regardless of whether the assets are sold. This would include taxing unrealized gains, or paper profits, from investment assets like stocks and real estate.
Influenced by this news, the KOSPI index closed down 10%, marking its largest single-day decline since March of this year. Chip stocks were particularly hard-hit, with Samsung Electronics and SK Hynix falling over 12%. However, market participants widely believe the tax reform news was merely a trigger.
South Korean AI-related and semiconductor stocks had already accumulated substantial gains, leading to significant valuation expansion and extreme levels of concentrated investment. Lee Jae Mahn, a strategist at Hana Securities in Seoul, noted that SK Hynix's valuation had once surpassed that of Samsung Electronics, which itself was an important signal of an overheated market.
As the South Korean market gave way, the selling pressure quickly spread globally. Nasdaq 100 index futures fell 2.5%, S&P 500 index futures dropped 1.4%, and the European Stoxx 600 index declined about 1%, led by losses in the technology and resources sectors.
Even a US-Iran Agreement Fails to Rescue Markets, Signaling a Shift in Trading Themes
A noteworthy phenomenon is that this market downturn occurred following a clear easing of geopolitical risks.
With the US and Iran reaching a provisional agreement, international oil prices retreated significantly. According to traditional logic, falling oil prices should imply easing inflationary pressures and improving risk appetite, which would typically benefit stock markets. However, the expected relief rally did not materialize. The S&P 500 index remained below its highs for the month, and credit spreads actually widened.
The reason is that the market's focus has shifted from the Middle East to the Federal Reserve. Last week, the Fed's dot plot indicated that half of its officials anticipate at least one more rate hike this year, while new Chair Kevin Warsh repeatedly emphasized the importance of restoring price stability.
Simultaneously, the market had previously viewed the Iran conflict as a temporary event, and the oil futures curve consistently reflected expectations for future price declines. This means the US-Iran agreement largely validated the market's existing assumptions rather than providing new positive catalysts.
For global stock markets that have experienced AI-driven surges and sit at elevated valuations, easing geopolitical risks is certainly good news. However, in the face of rekindled rate hike expectations, this positive factor is clearly insufficient to support a new wave of gains. The market is transitioning from "trading geopolitical risk" to "trading interest rate risk."
Wall Street Revisits the "Rate Hike" Discussion
What has truly altered the market's pricing logic is the dramatic shift in expectations for the Federal Reserve's policy path.
According to recent reports, Bank of America Securities' latest forecast anticipates the Fed will implement three consecutive 25-basis-point rate hikes in September, October, and December of this year, totaling 75 basis points, completely abandoning previous expectations for rate cuts. Goldman Sachs, Morgan Stanley, and Deutsche Bank have also recently warned that US services inflation, wage growth, and rising energy prices could significantly slow the pace of disinflation.
Bank of America expects the US core PCE inflation rate to rise to 3.5% year-on-year in May. As the disinflationary benefits from housing inflation gradually fade, non-housing service prices are expected to remain stubbornly high.
The bond market has already reacted. Last week, US Treasury futures trading volume hit a record high, with market-implied probabilities for a July rate hike surging from nearly zero to around 50%. Analysts at BNP Paribas stated that the internal stance within the Fed is undergoing a noticeable shift, suggesting "every meeting could be a window for action, including the July meeting."
What Does the AI Trade Fear? Rising Rates
For the AI-driven trade that has propelled global equity markets higher over the past two years, the resurgence of rate hike expectations is undoubtedly one of the most unfavorable environments.
The valuation logic for high-growth technology companies ultimately hinges on discounting future cash flows. When interest rates rise, the present value of future earnings naturally shrinks, and assets propped up by lofty expectations are often the first to suffer. The market has reacted swiftly: Micron Technology fell over 7% in pre-market trading, ASML dropped more than 4%, and the global semiconductor sector faced broad pressure.
More alarmingly, the AI supply chain has accumulated a significant amount of leveraged capital and crowded trades. For example, a Hong Kong ETF related to SK Hynix once ballooned to $17 billion, becoming one of the largest ETFs locally. Once the trend reverses, such highly concentrated capital structures can easily amplify market volatility.
Mike Bell, Head of Strategy at RBC BlueBay, pointed out that when tech stock rallies become too rapid, and leveraged capital and retail participation continue to heat up, the market doesn't need much of a negative catalyst to trigger a sharp correction. The current environment may be a concentrated manifestation of this fragility.
AI Trade Faces Two Additional Pressures
Beyond rising rate hike expectations, the AI trade is confronting two increasingly significant challenges: regulatory risk and supply pressure.
First is the "weaponization of regulation" in the AI field. Recently, the US Commerce Department required AI company Anthropic to restrict foreign users' access to its latest model, indicating that Washington's restrictive measures are extending further into the AI models themselves. For investors, this introduces a new layer of uncertainty—AI competition is gradually evolving from commercial and technical dimensions into a matter of geopolitics and national security. The market finds it difficult to accurately price this policy risk.
Second is the impending wave of record-breaking equity supply. As SpaceX completed the largest IPO in history, achieving a valuation of approximately $1.77 trillion, the market is beginning to face a new question: who will absorb the continuous stream of new shares to come? AI star companies like Anthropic and OpenAI are still queuing up for listings, and the funds raised by SpaceX alone exceed the total raised by US IPOs over the past two years.
For technology stocks already at historically high levels, this means the market must digest not only higher interest rates but also a larger supply of shares. As liquidity conditions tighten at the margin, valuations remain elevated, and new financing demands continue to emerge, the AI sector is facing not just growth questions, but also issues of capital reallocation.
Why Are Only the Dollar and US Treasuries Rising?
Against the backdrop of widespread pressure on risk assets, the US dollar and US Treasury bonds have strengthened against the trend, becoming one of the few asset classes recording gains.
The underlying logic is straightforward: as the market begins to reprice the Federal Reserve's policy path, investors are pulling capital from high-valuation tech stocks and cyclical assets while increasing their holdings of US dollars and Treasuries to hedge against potential tightening risks. The market's focus has shifted from "when will rates be cut" to "will there be more hikes?"
This shift is particularly evident in the interest rate markets. SOFR futures, which are closely tied to Fed policy, show that positions betting on rate cuts are being unwound at an accelerating pace. For the June 2026 SOFR contract alone, open interest decreased by approximately 90,000 contracts in a single day, reflecting a systematic dismantling of the most crowded "rate cut trade" from the past year.
Capital flows have consequently changed significantly. Geoffrey Yu, Senior FX Strategist at BNY Mellon, stated that the shift in Fed expectations has effectively raised the performance threshold for all risk assets. As growth and liquidity prospects become more uncertain, the US dollar and US Treasuries are regaining favor as safe-haven assets.
Concurrently, risk assets faced widespread selling. Spot gold fell over 2%, Brent crude oil dropped more than 1%, and industrial metals like copper weakened. The Japanese yen continued to hover near multi-decade lows, reflecting persistent pressure from widening US-Japan interest rate differentials.
For the market, the signal from this capital flow rotation is clear: investors are transitioning from the "rate cut trade" to the "high-rate trade." In an environment where expectations for Fed policy are turning more hawkish again, the US dollar and US Treasuries remain the primary safe havens.
AI Bull Market Enters a Critical Stress Test
For the market, two key tests lie ahead in the coming days.
The first is the upcoming earnings report from Micron Technology (scheduled for June 25th, Beijing time). This will serve as an important window to observe whether demand within the AI supply chain remains robust.
The second is the US core PCE inflation data (scheduled for June 25th, Beijing time). If inflation continues to exceed expectations, it will further reinforce market bets on the Fed resuming rate hikes.
Over the past two years, the AI narrative, ample liquidity, and capital expenditure expansion jointly propelled global technology stocks higher. Now, with inflation resurging, interest rate expectations being revised upwards, and valuations climbing ever higher, the market is entering a new phase. Investors are no longer solely focused on how strong AI demand is; they are increasingly concerned with what that growth is truly worth in a higher interest rate environment.
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