Apple and Microsoft raising prices send a dangerous signal! AI inflation may backfire on demand, chip stocks plummet dragging down the South Korean stock market triggering a second circuit breaker.

Due to the sharp decline in chip stocks dragging down the Korean benchmark stock index Kospi, the Korean stock market triggered a trading halt for the second time this week, highlighting the market's high sensitivity to global Artificial Intelligence (AI) investment sentiment. After the Korea Exchange implemented a 20-minute trading halt, the Kospi index further widened its decline, falling by as much as 9%; Samsung Electronics and SK Hynix both saw intra-day declines of over 10%. Foreign investors net sold Kospi index component stocks worth 50 trillion Korean won (approximately 32 billion US dollars). As of the time of writing, the Kospi index narrowed its decline to 6.63%; Samsung Electronics fell over 7%, and SK Hynix fell nearly 9%. The sharp drop in the Korean stock market on Friday was in stark contrast to the big rise on Thursday. On Thursday, Micron Technology, Inc. reported strong earnings and optimistic outlook, coupled with SK Hynix's plans to list in the US, boosting market confidence in AI-related trades. However, as traders digested a series of recent developments including Apple Inc. increasing product prices due to a shortage of storage chips, local chip manufacturers in Korea announcing huge investment plans, and market concerns that OpenAI may delay its initial public offering (IPO) market sentiment quickly shifted to pessimism. Singapore's Longevity Bank strategist Homin Lee said, "This volatility is likely due to rumors about the delay of OpenAI's IPO and the news of Apple Inc.'s price hike." He pointed out that these factors further intensified discussions about whether the bottleneck for storage chips has reached its limit and added that, fueled by various leveraged trades, market volatility is expected to continue. On June 25, Apple Inc. announced price increases for Macs, iPads, and home devices to deal with the unprecedented cost pressures brought about by the surge in demand for memory chips and storage due to the rapid expansion of AI data centers. An Apple Inc. spokesperson said, "The rapid expansion of AI data centers has led to an extraordinary increase in demand for memory and storage," and the company had never seen component prices rise so quickly and significantly, stating that they have tried to absorb the cost pressure before, but now it is time to raise prices. A few hours after Apple Inc.'s announcement, Microsoft Corporation also announced that consumers would have to pay higher prices when buying Xbox game consoles in the future due to continuous cost increases for key components. Microsoft Corporation noted that the main reason driving this price increase was the significant rise in storage and memory costs, stating that "game console storage and memory prices have risen by more than 2.5 times, and we expect them to double again by the fall of 2027." Since the second half of 2025, the global storage chip industry has seen a rare overall uptrend, especially with LPDDR and other DRAM used for smartphones facing ongoing shortages. Market research firm Counterpoint projected that the price of LPDDR4/5 in the second quarter of 2026 is expected to increase by approximately two times compared to the fourth quarter of 2025. The price increases by Apple Inc. and Microsoft Corporation indicate that the upstream cost increases have exceeded the absorptive capacity of industry leaders, and AI costs are starting to flow from data centers to consumers. The market is now questioning how long upstream profits can endure if consumers are unwilling to bear the costs of AI. The price increases by Apple Inc. and Microsoft Corporation signal that the industry's pricing power enhancement may come at the expense of future demand, prompting a comprehensive repricing of AI-related semiconductor stocks. Charu Chanana, Chief Investment Strategist at Shengbao Market, said, "The storage chip market still has momentum, but positive factors have become more selective while negative factors have covered a broader market." "The risk is that the stronger storage chip business cycle today could drag down the entire AI industry chain tomorrow, and the market has begun to price this in." Additionally, news of the two major Korean memory chip makers preparing for large-scale AI investments has also impacted investor sentiment, as these two stocks together account for nearly 60% of the Kospi index's weight. Reports suggest that Samsung Electronics and SK Hynix are planning to announce new investment plans totaling billions of US dollars next Monday. Samsung Electronics is expected to unveil a total investment plan of up to 10 trillion Korean won (approximately 64.6 billion US dollars) over the next decade, making it the largest investment plan in Korean history. Homin Lee said, "We suspect that the capital expenditures being prepared by the major Korean memory manufacturers are the main reason for the stock price decline. If there is any change, the expansion of production capacity is crucial for them to maintain market dominance and long-term stability." Leveraged ETFs + Retail Investors Flocking In! Korean Stock Market Enters High Volatility Era Since the beginning of this year, the Kospi index has triggered trading halts multiple times. The Korean stock market this year has not been like an ordinary market but more like a high-leverage machine modified by AI trading, with the increasing participation of retail investors intensifying market volatility. It is reported that Exchange-Traded Funds (ETFs) tracking Samsung Electronics and SK Hynix use derivatives and swap contracts to leverage investments in the underlying securities, allowing investors to potentially earn returns significantly higher than the performance of the underlying assets. While these ETFs can amplify investment returns, they can also further exacerbate stock market volatility. Given the rapid expansion of these leveraged products and their increasing role in amplifying Korean stock market volatility, their rebalancing mechanism is being closely monitored. Since these funds must rebalance daily to maintain a fixed leverage multiple, they are forced to buy on market upticks and sell on downticks. The fluctuations in the Korean stock market on Tuesday fully illustrated this phenomenon. On that day, SK Hynix and Samsung Electronics saw stock prices fall by more than 12%, leading the Kospi index to experience its most severe sell-off since the outbreak of the Middle East war. An analyst at Bloomberg Intelligence noted that the selling pressure comes from the mechanical rebalancing of these products to reset their daily double leverage exposure. When the net asset value of the ETF falls, the ETF needs to sell the underlying assets it holds, further reinforcing the downtrend. In this situation, the Korean regulatory authorities have announced that they are studying measures to curb the risks posed by these leveraged ETFs. On Monday, the Financial Supervisory Service Director Lee Chan-Jin stated at a press conference that the regulatory agency is considering strengthening the monitoring of trading patterns and studying other market stability measures to limit the potential impact of these ETFs' intense volatility. Furthermore, the frenzy of retail investors entering the market is also one of the key factors driving the continuous rise in the Korean stock market this year and intensifying market volatility. It is reported that the number of stock accounts in Korea has increased by more than 10 million this year, with a significant increase in the number of accounts opened by minors. Data compiled by Toss Securities showed that in the first quarter of this year, the number of new accounts opened by minors under the age of 18 in Korea increased nearly tenfold compared to the same period last year. Korean retail investors seem to have adopted a mentality of "I would rather completely collapse than miss out on this bull market." The extreme volatility in the Korean stock market has even led some analysts to compare its intraday movements to a meme stock frenzy. The Kospi 200 Volatility Indexreflecting the options prices of the Kospi 200 index reached new highs over the past two days, currently about five times that of the US Cboe Global Markets Inc's Volatility Index (VIX). Daniel Tan, fund manager at Grasshopper Asset Management, said, "Swift volatility without a clear direction is very painful for trading. We are watching where the market settles and might consider increasing tech stock positions." The intense volatility has also driven demand for risk-hedging tools in the market. Post-market this week saw a surge in block trades, including a large transaction worth nearly 500,000 contracts with a nominal value exceeding 15 trillion Korean won, which pushed the open interest of Samsung Electronics options to historic highs. The open interest of SK Hynix options also neared record levels, while the open interest in the iShares MSCI Korea ETF traded in the US hit a new all-time high before the monthly expiration date last week.