Global tech rout deepens as KOSPI plunges 10.8%, AI spending fears rattle markets

Asia leads the rout

South Korea's benchmark KOSPI index closed down 10.8% on Tuesday, its steepest one-day drop in months, after falling nearly 11% intraday and triggering a temporary trading halt. The sell-off wiped out a third of the index's value over the past month, though it remains more than 40% higher for the year. On Wednesday, the KOSPI slid as much as 12.6% at one point before recovering to close down 5.98%, according to Korea Exchange data. By Thursday, the index was down another 1%, on track for a 15% weekly slump. Japan's Nikkei and Taiwan's benchmark each fell around 4% on Tuesday, while China's CSI 300 dropped more than 2% on Thursday, putting it on course for its worst month since January 2016.

AI spending fears and China competition

The rout was fuelled by mounting unease over the massive capital spending by US tech giants on artificial intelligence infrastructure. Alphabet burned through cash for the first time as a public company, and Meta vowed to press on with investments, dashing hopes it would resell surplus data centre capacity. Microsoft's chief financial officer Amy Hood described the present shortage of capacity as a "relatively extreme moment". At the same time, cheaper AI models and China's emergence as a competitive threat in memory chips have loosened South Korea's grip on the market. The combined market capitalisation of three top Chinese AI firms, Innolight, Eoptolink and Cambricon Technologies, fell by more than $50bn on Thursday.

It's a relatively extreme moment.

Regulatory response in Seoul

South Korean authorities scrambled to contain the damage. Finance Minister Koo Yun-cheol apologised for the rollout of single-stock leveraged exchange-traded funds, which have been blamed for exacerbating volatility. Regulators had already banned new sales of such funds two weeks ago, and a higher minimum deposit requirement takes effect on Friday. A larger minimum trading lot threshold will follow in November. The finance ministry said it would "immediately pursue" measures such as capping exposure to the funds at 20% of an investor's portfolio or applying excessive order fees. Retail investors have cut margin loans by more than 10% since late June across South Korea, Taiwan and mainland China.

Fed holds steady amid market turmoil

The US Federal Reserve kept interest rates unchanged at 3.5% to 3.75% on Wednesday, but the decision drew three dissents, leading analysts to label it a "hawkish hold". New Fed Chair Kevin Warsh, appointed by President Donald Trump, vowed to contain inflation but offered no clear steps. Yields on 30-year US bonds hit 5.2273%, the highest since June 2007. Wall Street veteran Ed Yardeni said the mixed message undermined credibility.

Talking hawkish but not acting so reduces the Fed's credibility. We conclude that the Fed has to raise short-term rates to lower long-term rates.

Chip giants' earnings fail to calm nerves

Samsung Electronics and SK Hynix, which together account for roughly half of the KOSPI's weighting, reported record profits for the June quarter. SK Hynix's results missed lofty investor expectations, however, and Samsung's more than 250-fold rise in semiconductor profit was overshadowed by the broader sell-off. Samsung said AI chip demand would stay strong and supply short this year. South Korea's exports are forecast to rise 59% in July from a year earlier, slower than June's 70.7% surge but still robust, driven by a 180.6% jump in semiconductor shipments in the first 20 days of the month.

Global spillover

The turbulence spread to US and European markets. The Nasdaq 100 fell 1% on Tuesday, ending the day almost 10% below its June peak, while the Dow Jones Industrial Average rose 1% as investors rotated away from tech. Micron and AMD each declined more than 8%, and Nvidia remains more than 15% below its May peak. In Europe, Infineon fell over 6% and ASML shed 2.9%. The KOSPI Volatility Index traded around 86 on Thursday, reflecting historically high demand for protection.