AI trading faces interest rate hike test: Apart from the US dollar and US Treasuries, everything else is falling.

Risk assets sold off collectively across global markets on Tuesday.

The Korean KOSPI index plunged 10%, triggering a circuit breaker; Nasdaq 100 futures fell over 2.5%. European tech and semiconductor shares were under pressure across the board, while gold, silver, copper, and oil all dropped simultaneously. In stark contrast, the US dollar and US Treasury bonds were among the few assets rising.

On the surface, what triggered the market was a Korean policy discussion document regarding capital gains taxation. But at a deeper level, expectations of US Fed rate hikes are rapidly heating up. As Bank of America and other Wall Street giants collectively raise forecasts for inflation and interest rates, the low-interest-rate narrative supporting the AI bull market of the past two years faces challenges, with high-valuation tech stocks bearing the brunt.

Markets are re-evaluating a key question: If the AI investment cycle continues but funding costs rise again, can current valuations still hold?

Korean stocks collapse first

During Asian trading hours Tuesday, Korea’s stock market was the first to fall. A document circulating in the market discussing bringing unrealized gains on stocks and real estate into a comprehensive tax system triggered panic selling.

According to Wallstreetcn quoting Yonhap News, on the morning of June 23, lawmakers from multiple Korean parties, including the Democratic, Progressive, and Social Democratic parties, jointly participated in a tax reform forum. The core argument was to promote a transition to “comprehensive income tax”—whether or not assets are sold, taxation is based on substantive net asset appreciation, and unrealized gains (book appreciation) from stocks and real estate are included in taxable income.

Influenced by this news, the KOSPI closed down 10%, marking the biggest single-day drop since March 2024. Chipmakers were hit hardest; Samsung Electronics and SK Hynix fell over 12%. However, market participants generally believe the tax reform news was merely the trigger.

Previously, Korea's AI concept and semiconductor sectors had amassed huge gains, with valuations expanding significantly and capital concentration reaching extreme levels. Seoul’s Hana Securities strategist Lee Jae Mahn stated SK Hynix’s valuation once surpassed Samsung Electronics, itself an important sign the market was overheated.

As Korea faltered, selling quickly spread globally. Nasdaq 100 futures fell 2.5%, S&P 500 futures dropped 1.4%, Europe’s Stoxx 600 index fell about 1%, with tech and resources sectors leading declines.

Not even a US-Iran deal can save markets: the trading narrative has changed

A notable phenomenon is that this round of market declines occurred after geopolitical risks eased significantly.

As the US and Iran reached a phased agreement, international oil prices fell sharply. Traditionally, falling oil prices mean easing inflation pressure and improved risk appetite, which should benefit stocks. However, the expected “relief rally” did not occur; the S&P 500 remains below its monthly peak, and credit spreads have actually widened.

The reason is the market’s focus has shifted from the Middle East to the US Fed. Last week, the Fed’s dot plot showed half of its officials expect at least one more rate hike this year, while new chair Kevin Warsh repeatedly stressed the importance of restoring price stability.

At the same time, the market had always viewed the Iran conflict as temporary; oil futures curves consistently reflected expectations of future oil price declines. This means the US-Iran agreement merely confirms previous market judgments, rather than bringing new positive factors.

For global stocks, already inflated by the AI-driven rally, easing geopolitical risk is certainly welcome, but facing revived rate hike expectations, this positive is hardly enough to support another rally. Markets are shifting from “trading geopolitical risk” to “trading interest rate risk.”

Wall Street resumes discussion of rate hikes

What truly altered market pricing logic is the dramatic change in Fed rate path expectations.

As reported by Wallstreetcn, Bank of America Securities’ latest report predicts the Fed will raise rates three times—in September, October, and December—by 25 basis points each, totaling 75 basis points, abandoning previous rate cut expectations completely. Goldman Sachs, Morgan Stanley, and Deutsche Bank recently warned that US services inflation, wage growth, and rising energy prices may significantly slow the process of inflation reduction.

BofA expects US core PCE annual growth to rise to 3.5% in May. As the disinflation dividend from housing fades, non-housing services prices remain sticky.

The bond market has reacted in advance. Last week US Treasury futures trading volume hit a record, and pricing probability for a July rate hike surged from near zero to around 50%. BNP Paribas analysts said the Fed’s internal stance is shifting noticeably, “every meeting may be a window for action, including the July meeting.”

What does AI trading fear? Rising rates

For the AI trades fueling global stock gains over the last two years, rising rate hike expectations are undoubtedly among the most unfavorable environments.

The logic behind high-growth tech company valuations ultimately depends on discounting future cash flows. When rates rise, the present value of distant earnings shrinks, so assets whose high valuations are based on expectations often bear the brunt. The market has responded rapidly: Micron fell over 7% pre-market, ASML dropped over 4%, and semiconductor stocks worldwide are generally under pressure.

More worryingly, the AI industry chain has accumulated massive leveraged funds and crowded trades—for example, Hong Kong’s SK Hynix-related ETF at one point ballooned to $17 billion, becoming one of the largest local ETFs. Once direction reverses, highly concentrated capital structures easily amplify market swings.

RBC BlueBay strategy head Mike Bell noted, when tech stocks soar too quickly and leveraged funds plus retail participation surge, it doesn’t take much of a negative catalyst to trigger sharp corrections. The current environment may be precisely a manifestation of this fragility.

Two additional pressures for AI trading

Besides rising rate hike expectations, AI trades face two increasingly hard-to-ignore challenges: regulatory risk and supply pressure.

First is “weaponized regulation” in the AI field. Recently, the US Department of Commerce asked AI firm Anthropic to restrict foreign user access to its latest models, meaning Washington’s restrictions have extended to AI models themselves. For investors, this introduces a new uncertainty—AI competition is evolving from a commercial and technical issue to geopolitical and national security terrain. The market is unable to accurately price this policy risk.

Secondly, record-breaking stock supply is about to arrive. As SpaceX completes the largest IPO in history, with a valuation of roughly $1.77 trillion, the market faces a new question: who will absorb the continuous flow of new stocks? Anthropic, OpenAI, and other AI stars are still lining up to go public. SpaceX alone raised more funds than all US IPOs in the past two years combined.

For tech stocks already at historic highs, this means the market must not only absorb higher interest rates but also greater stock supply. When liquidity is marginally tightening, valuations are elevated, and new financing demand keeps emerging, the AI sector faces not just a growth issue, but a question of capital reallocation.

Why are only the dollar and US Treasuries rising?

With risk assets generally under pressure, the US dollar and Treasury bonds are gaining against the trend, becoming among the few asset classes with gains.

The underlying logic is not complex: as the market begins to reprice the Fed’s policy path, investors are withdrawing from high-valuation tech stocks and cyclical assets while increasing holdings in dollars and Treasuries to guard against potential tightening risk. The focus has shifted from “when to cut rates” to “whether more hikes are coming.”

This shift is most evident in rate markets. SOFR futures, highly tied to Fed policy, show rapid unwinding of previous rate-cut bets. The June 2026 SOFR contract alone saw open interest drop by about 90,000 in a single day, reflecting a systematic unwinding of last year’s most crowded “rate-cut trade.”

Funds have also shifted noticeably. BNY’s senior FX strategist Geoffrey Yu said changing Fed expectations have “raised the performance threshold for all risk assets.” As growth and liquidity outlooks become more uncertain, dollars and US Treasuries regain favor as safe-haven assets.

Meanwhile, risk assets are suffering broad sell-offs. Spot gold plunged over 2%, Brent crude fell over 1%, and industrial metals like copper weakened in sync; the yen continues to hover near its multi-decade low, reflecting ongoing pressure from widening US-Japan yield spreads.

For markets, the message behind these flows is clear: investors are switching from “rate-cut trades” to “high-rate trades.” With the market’s Fed policy outlook turning hawkish again, dollars and Treasuries remain the main safe haven right now.

AI bull market faces a critical stress test

For markets, the next few days bring two key tests.

First, Micron’s upcoming earnings report (June 25, Beijing time). This will serve as an important window to gauge whether AI industry chain demand remains robust.

Second, US core PCE data (June 25, Beijing time). If inflation continues to exceed expectations, it will further reinforce bets on renewed Fed rate hikes.

Over the past two years, the AI narrative, loose liquidity, and expansion of capital expenditures have together driven global tech stocks higher. Now, with inflation resurging, rate expectations revised upward, and valuations climbing, the market enters a new phase: investors care less about how strong AI demand is, and more about how much this growth is worth in a higher-rate environment.

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