South Korea's stock market sank to its lowest level in three months on Tuesday as a sell-off in AI-related stocks intensified, with major chipmakers Samsung Electronics and SK Hynix both falling by more than 10%. The Kospi share index dropped 11.5% to its lowest point since mid-April, dragged down by investor concerns over massive borrowing by AI companies to fund datacentre expansions and rising competition from Chinese semiconductor firms.
US tech stocks extend losses
The sell-off extended to Wall Street, where US chip stocks continued their decline. Intel, Advanced Micro Devices, Sandisk, Western Digital Corp, and Seagate Technology all fell by more than 4% at the open. The Nasdaq 100 index of leading tech stocks dropped as much as 1.8%, briefly entering market correction territory — more than 10% below its early June record high — before rebounding to settle roughly flat on the day.
Apple bucks trend
Apple rose to briefly become the second company ever to surpass a $5tn (£3.76tn) valuation, as investors sought a safe haven amid the AI rout. Analysts attributed the tech sell-off to renewed worries over AI investment spending and competition from cheaper Chinese companies, following a report by The Information that China had begun mass production of homegrown deep ultraviolet (DUV) chip-making tools.
“We believe the market was likely spooked by the progress of China’s chip-making equipment capabilities, and was worried that this progress would threaten the competitive position of global chip making and chip equipment leaders,” said Jing Jie Yu, an equity analyst at Morningstar, adding that the sell-off was “largely a kneejerk reaction and overdone.”
Chinese chipmaker surge
On Monday, shares in Chinese memory chip maker CXMT surged 466% on its Shanghai stock exchange debut, underscoring China’s push to build its own AI supply chain. The rally heightened fears among investors that US and South Korean chipmakers could lose market share to Chinese rivals.
Circular funding concerns
Investors also grew jittery about the “circular funding” at the heart of the AI industry, where AI firms finance one another. On Monday, the Wall Street Journal reported that Nvidia was in discussions with OpenAI about providing $250bn (£188bn) for a massive datacentre project in Ohio. Nvidia’s backing, given its investment-grade credit rating, could lower funding costs for the project. However, news of the talks knocked Nvidia shares 5% lower on Monday, closing below $200 per share, while the cost of insuring Nvidia’s debt against default via credit default swaps (CDS) rose.
“The market reaction to the Nvidia news was swift. Nvidia fell 5% and closed the session below the $200-per-share mark. More importantly, Nvidia’s five-year CDS spiked, suggesting that it may not yet be the right time to buy the dip,” said Ipek Ozkardeskaya, a senior analyst at Swissquote.
Beijing's role and investor nerves
Some analysts suggested that Beijing, aiming to win a tech war with the US, is providing US companies with cheap AI systems, undercutting efforts by Anthropic, OpenAI, Microsoft, and Google to dominate AI tools. Danni Hewson, head of financial analysis at stockbroker AJ Bell, said investors were braced for more AI companies to warn about their outlook, further undermining confidence.
“Nerves about the huge amount of cash being splashed have been building for months. Investors will be keen to hear how those massive sums of cash have been utilised by mega caps like Microsoft and Meta and, crucially, what returns are being made on those investments,” she said. “Chip stocks have once again led declines as the market flexes, some companies like Amazon are upping their own chip capabilities, and China’s CXMT stock market debut has cemented fears about a lost market for US companies constrained by trading restrictions.”
European markets buck trend
London and European exchanges bucked the global sell-off on Tuesday. The FTSE 100 index of leading UK companies rose 89 points to 10,871, while the Paris CAC 40 edged 52 points higher to 8,458.
