South Korea becomes a "pressure cooker" for global AI trades: $50 billion leveraged ETFs increase volatility, Asia's hardware supply chain faces a fundamental test.

The core pressure of global AI trading is concentratedly releasing in the Korean market. The KOSPI index is experiencing violent fluctuations, leveraged ETF scale has expanded to $50B, and the derivatives market structure is becoming fragile—Korea has evolved into a high-leverage version of the global AI narrative, and the risk of its local pressure escalating into a global event is rising.

The KOSPI and the Nasdaq 100 Index continue to move in close sync, confirming they share the same AI trading logic. However, the volatility in the Korean market far exceeds that of US stocks. Over the past month, the KOSPI has delivered nearly zero returns but has exhibited extreme volatility. As one of the largest AI-themed markets globally, the spillover cost of local pressure will far exceed that of typical small-cap assets.

According to JPMorgan, the assets under management of leveraged ETFs linked to Korean underlying assets have expanded to approximately $50B, with related gamma exposure gaps potentially exceeding $1B, and market maker hedging flows are becoming an increasingly powerful amplifier of market volatility.

Meanwhile, the Korean swap market infrastructure is under excessive strain, with financing costs rising, and some investors have started shifting to cash trading.

KOSPI: The high-leverage version of AI trading

The KOSPI currently remains above the short-term trendline and the 21-day moving average, two critical technical support levels. If the index effectively breaks below the trendline, it likely means the current adjustment will continue.

In terms of correlation, the KOSPI and the Nasdaq 100 Index move almost in lockstep, both serving as market expressions of global AI theme trading. The key difference is that the Korean market has become a leveraged version of this trade—whether up or down, the volatility amplitude is significantly magnified.

Over the past month, the actual return of the KOSPI has been nearly zero, yet it has experienced exceptionally violent two-way fluctuations. If it were a small-cap stock, the market might ignore it; but as the fifth or sixth largest stock market globally, the potential spillover risk is of a completely different magnitude.

Options market: Volatility itself becomes a source of risk

The ratio of the KOSPI Volatility Index (KOSPI VIX) to the US VIX has broken into extreme territory, and the degree of deviation in this ratio is extremely rare.

High implied volatility means options premiums are abnormally expensive, which causes even a sideways market to inflict heavy losses on investors holding long call options—time value decays rapidly (theta decay) erodes option value, forcing investors to close positions and exit.

Once a large number of investors exit en masse, market makers are forced to engage in reverse hedging, amplifying downside pressure. This feedback loop is not hypothetical. During the adjustment in March this year, the market had already experienced the same transmission mechanism.

Leveraged ETFs and Gamma imbalance: The double-edged sword of momentum

The scale of leveraged ETFs linked to Korean underlying assets has grown to approximately $50B, largely a product of the sustained market rally. As the size of such products expands, their influence on price trends also increases.

The rebalancing mechanism of leveraged ETFs is pro-cyclical: it fuels momentum during uptrends and accelerates selling during downtrends.

JPMorgan estimates that the current gamma exposure gap may have exceeded $1B, making market maker hedging an independent and non-negligible driving force for market volatility.

Swap market: Infrastructure pressure quietly builds

The Korean swap market is facing increasing pressure. The surge in trading activity has pushed related infrastructure beyond its designed capacity, leading to consequences such as higher capital requirements, greater difficulty in hedging concentrated positions, and rising financing costs.

Some investors are switching their trades from swaps to the cash market to avoid the accumulating market frictions. This shift itself is a direct reflection of structural market pressure.

Asian AI supply chain: The upward momentum of profit margins begins to slow

One of the core logics supporting the Asian AI rally is showing signs of weakening. The pace of upward revisions in expected profit margins across the Asian AI hardware supply chain is no longer accelerating as it did before.

However, capital expenditure growth by hyper-scale cloud computing companies still far exceeds that of semiconductor equipment spending, meaning supply-side constraints can still support supply chain profit margins at this stage.

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