Original source: Research Beyond the Surface
In May, the U.S. added 172,000 non-farm jobs, more than double the market expectation. This should have been a reassuring report— the economy is not stalling, and employment is still expanding. However, the way it dropped felt more like a trigger being pulled.
On Friday, June 5, the Nasdaq Composite Index fell 4.18%, marking its worst single-day performance since April 2025; the Philadelphia semiconductor index dropped 10.26% in a single day, with the chip sector collectively losing more than one trillion dollars in market value, making it the worst day since the market circuit breakers in March 2020. Three days later, on Monday morning, the South Korean KOSPI opened down more than 8%, breaking below 7,500 points and triggering a circuit breaker, forcing the exchange to pause trading for 20 minutes; A-shares opened lower and declined further, with the Shanghai Composite Index losing 4,000 points during the session; the Nikkei and Taiwan stocks each fell nearly 4%.
A non-farm employment number that isn't particularly alarming flipped technology stocks from New York to Seoul within 48 hours. The magnitude and triggers are severely mismatched, and that is what truly warrants examination about this decline.
The real problem is not the 172,000 jobs, but the positions it hit
Categorizing this drop under rising interest rate expectations does not make sense.
After the non-farm payrolls were released, the yield on the 10-year U.S. Treasury indeed jumped to 4.5%, and the two-year yield reached 4.17%, the highest since February 2025, erasing market bets on interest rate cuts this year and beginning to price in rate hikes. When rates go up, high-valuation growth stocks are hit first; that logic is not wrong. However, the problem is that on the same day, the Dow Jones only fell by 1.35%, the Russell 2000 small-cap index briefly turned positive, and nearly half of the stocks in the S&P 500 were still rising. If interest rates were indeed systematically re-evaluating all assets, this wouldn’t be the manner of execution.
Sell pressure is highly concentrated, especially in the stocks that had surged the most and been most crowded in the past two months.
How crowded this group is became evident when Wall Street sounded alarms before the crash. According to Goldman Sachs, the global hedge fund net leverage rate surged from below 70% to above 80% in less than two months, approaching the 85th percentile in nearly five years; net positions in the information technology sector increased by 853 basis points in a single quarter, the largest quarterly increase on record; the semiconductor industry accounted for 19% of the total exposure of global hedge funds, a historical high, and this ratio had more than doubled since the beginning of 2026.
Citi strategist David Chew made it clear three days before the crash: bullish bets on the Nasdaq 100 had been stretched to extreme levels, and "any negative catalyst would significantly increase the likelihood of profit-taking and long liquidation." Citi's famous "bear market checklist" triggered 11.5 out of 18 items on June 5, the highest reading since the 2008 financial crisis.
When a sector is being bet on in the same direction and with the same leverage by global funds, it is no longer a diversified investment but a trade. In a trade, someone always has to press the sell button first.
The non-farm report is the reason for pressing that button.
This crowding can also self-reinforce. In recent years, trend-following quantitative funds, risk parity strategies, and a large number of zero-day expiration options have become significant forces in the U.S. stock market; their commonality is following the trend. Once prices drop below key levels, and volatility spikes, models will mechanically reduce positions, and the act of selling itself compresses prices and raises volatility, feeding into the next wave of selling. Humans decide whether to sell, while machines determine how fast to sell. On June 5, the VIX index surged by about 34%, crossing back above 20, marking the signal that this positive feedback loop had been triggered. As for how much volume was actually sold through systematic liquidations that day, the market lacks public data; it remains a matter of mechanistic judgment, not needing to be calculated into an exact amount.
Observing individual stocks reveals that this is deleveraging
Those who rose the most are the ones who fell the hardest this time.
May was a month of frenzy for chip stocks. The Philadelphia Semiconductor Index saw a rise of over 60% year-to-date, with 22 out of the last 23 trading days being positive; Micron surged by 154% at one point this year, SanDisk increased nearly fivefold, and AMD rose 40% just in May, hitting a historical high. When money flows in one direction, valuation matters little.
On June 5, the bill came due. Marvell had previously surged about 25% on Jensen Huang’s mention of a "potential trillion-dollar company," but that day it returned over 16%, leading the drop in chip stocks; Micron fell about 13%, while AMD and Intel each dropped about 11%. They were all names from the earlier rally.
In contrast, Nvidia only fell about 6% that day. Its market capitalization fell below $500 billion, losing nearly $280 billion in a single day, which sounds alarming but is relatively resilient amidst the chaos. The generals are still standing, while the ones who fell are the soldiers who charged forward and leveraged heavily. This pattern of "leaders holding firm while the margins collapse" is a typical scene of deleveraging, rather than a symptom of fundamental collapse—if AI demand were to truly falter, Nvidia should be the first to face scrutiny.
The immediate trigger was Broadcom. On June 3, it provided third-quarter AI chip sales guidance of $16 billion, below the market expectation of $17.2 billion, and crucially did not raise its annual AI chip target. In a market that had long been accustomed to "upward revisions every quarter," maintaining "unchanged" was interpreted as bearish. A tightly stretched string was lightly plucked and snapped.
Why did Korea trigger the circuit breaker first?
Sell pressure descended from the heaviest positions, with the first stop being Korea.
On Monday, when Seoul opened, Samsung Electronics and SK Hynix both dropped about 10% during the session. Together, these two companies account for nearly half of the KOSPI's total market value—this indicates how concentrated the bet on AI is in the South Korean stock market. The KOSPI is one of the best-performing markets globally this year, having risen the most, and consequently has the most significant pullback potential; when global funds need to cash out and reposition, the most heavily weighted, liquid South Korean tech stocks become the easiest "ATM." Traders from BNY and Lucerne Asset Management used similar phrases: these are the globally heaviest positions, naturally becoming the first to be sold off for liquidity.
The amplifier effect includes local Korean leverage. As of June 4, the retail margin balance in Korea was still at a historical high of 37.74 trillion won; the won fell to nearly 1560 to 1 dollar on Monday, with foreign capital outflows accelerating. Some brokerages suspended margin trading due to exhausted credit limits. On that day, the finance minister, central bank, and financial regulators of Korea released a joint statement promising to intervene in the foreign exchange market.
This chain descends towards Taiwan’s TSMC, as well as the Chinese A-shares’ computing power chain. Their proximity to the epicenter varies, and the logic of trading differs.
Which assets to watch in this round, and how to watch
Asset reactions occur in a certain sequence, so don't stir them all together.
The first to move, and also the most sensitive, is HBM at the epicenter. High-bandwidth memory is currently the hardest bottleneck in AI computing power, with SK Hynix holding more than half of the global market share, followed by Samsung; these two are the most directly traded entities this round. Their performance basically defines the upper limit of sentiment for the entire chain. Monitoring their prices is more accurate than watching any AI concept index.
Next outward is the batch of heavily crowded U.S. chip stocks within the Philadelphia Semiconductor Index—Micron, Broadcom, Marvell. They react as the underlying basis, with the extent of decline determined by the pace of position liquidation and not by fundamentals. Further out, TSMC represents the throat for processes and advanced packaging, belonging to the more fundamental chain nodes.
The A-share light modules, CPO, PCBs, and servers represent a diffusion of the chain. They have real performance correlations with global AI capital expenditures, with orders indeed following Nvidia’s and Broadcom's deployments, but their pricing contains a higher expectation component, thus providing more elasticity; if the epicenter sneezes, they are prone to catch a cold. As for a cohort of high-flying thematic stocks and crypto assets that surged alongside AI concepts, they are more about sentiment and leverage following the trend, with no direct fundamental support; these positions warrant caution. In contrast, the pricing of A-share computing power chains incorporates more local funds and policy expectations, not necessarily synchronized one-to-one with U.S. stocks, but as long as the global AI narrative remains an anchor for pricing, it’s difficult for them to disengage completely from this round of liquidation.
On the cross-asset front, the declines in gold and Bitcoin follow the same logic: rising real interest rates put pressure on non-yielding assets. On June 5, gold dropped by over $100, falling below $4,370 and erasing all gains made this year; silver fell in tandem, and Bitcoin briefly dipped below $60,000. The dollar index, on the other hand, strengthened consistently, with the strong dollar combined with rising real interest rates exerting uniform pressure on non-yielding assets. By Monday, Bitcoin had already rebounded back above $63,000, indicating that risk sentiment had begun to recover ahead of the stock market; this signal is worth noting.
If net leverage starts to decline, the VIX index peaks and declines, and order prices for HBM and computing power remain tight, this round is likely a sharp but phase-specific liquidation, opening up room below. However, if the CPI on June 10 exceeds expectations, coupled with a shift towards rate hikes in the Fed's June 16-17 meeting dot plot, that would change the nature of the landscape— a systemic upward shift in interest rate norms would mean high-valuation AI assets facing a complete rewrite of valuation logic; deleveraging would be just the opening act, at which point one must reckon with reality and adjust towards a more cautious direction. Another inverse signal to watch: if core stocks like Nvidia and SK Hynix start to lower guidance or relax capital expenditures, that would mark the real moment when fundamentals face serious issues.
It’s the positions that are collapsing, not the AI narrative
In the same week that semiconductor shares evaporated a trillion, TSMC chairman Wei Zhe-jia stated at the shareholder meeting that global chip supply "will not meet AI demand for years to come," forecasting demand for advanced processes to exceed capacity by 25% to 30% by 2026. Jensen Huang said on June 7 in Seoul that the memory shortage "will last for several years"; Nvidia and SK Hynix just announced a multi-year memory cooperation, and SK Hynix's HBM production capacity for 2026 is already fully sold out. The company's chairman, Choi Tae-won, even pushed the shortage timeline to 2030. DRAM prices surged by about 90% quarter-over-quarter in the first quarter of this year.
On the demand side, there are no signs of any weakening. What collapsed is not this narrative, but the manner in which bets on it were placed.
Jensen Huang responded to Friday's crash with a single statement, saying to reporters in Seoul: "We're just getting started, no matter what happens in the stock market, you should be happy because you can buy at a discount now." This statement has his perspective, but it points to a core divergence: if you believe AI is an infrastructure like the internet, then the reshuffling of positions is the window to get on board; if you doubt whether the returns on this round of computing investments will ultimately be realized, then Friday marks the start of a fissure.
Some people do not even agree with the term "panic selling." In their view, Friday’s market resembled a rotation: the money did not exit; it simply changed seats, pulling out of crowded semiconductors and flowing into banks, industrials, and value stocks, with the Russell 2000's counter-trend rise as supporting evidence. Under this interpretation, it’s a healthy rebalancing packaged in an intimidating exterior. Goldman Sachs strategist Muller-Grisman has also stated that seeing some consolidation "is not necessarily a bad thing," as speculative leverage and options positions should have been digested anyway. Such voices remind people not to interpret a deleveraging as the end of the world, but they do not answer one crucial question: before positions are genuinely cleared and volatility genuinely peaks, no one can guarantee that there won't be a second wave.
Neither of these judgments has reached a definitive conclusion yet. What can be confirmed at this moment is that the crowded trades built up by global funds over the past two months are being forcibly dismantled. This process is intense, chain-reaction driven, and not yet complete; Korea triggering a circuit breaker on Monday only indicates that the clearing is far from over.
In the coming week, it’s sufficient to focus on three things: the CPI on June 10, the first rate-setting meeting led by Waller on June 16-17 along with the dot plot, and whether Korean stocks can stop falling. They will tell you whether this is a healthy deleveraging or the beginning of a longer adjustment phase.
This article comes from: Research Beyond the Surface
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