Five-year credit default swaps on the five largest US hyperscalers have jumped to a record 162bps, implying 12% odds of default within five years. In Seoul, a second day of circuit breakers left the KOSPI down nearly 17% and $620 billion lighter after SK Hynix missed earnings estimates.
The cost of insuring the debt of the biggest AI spenders reached a record this week while Korean chip stocks crashed for a second day, putting the AI trade's leverage on display in credit markets as well as equities.
Seoul's second circuit-breaker day wipes $620 billion
Korean equities ran through a second day of a historic sell-off on Wednesday, with market-wide circuit breakers again halting trading. Combined with Tuesday's drop, the KOSPI has shed nearly 17%, wiping out $620 billion in market capitalization.
The trigger was SK Hynix's Q2 earnings miss, and the government has since convened an emergency meeting of its financial authorities. The chipmaker's stock fell another 4% on Wednesday, extending Tuesday's 15% drop, and together with Samsung Electronics it makes up nearly half of the Korean index.
Retail leverage deepens the losses
This week's drop is hitting risk-loving young Korean retail traders, who have historically had an affection for the crypto sector but flocked to AI and semiconductor equities in recent months. Korean crypto volumes are down 28%, while the KOSPI remains up 31% year-to-date.
Single-stock leveraged exchange-traded funds, approved and launched for retail trading in May, drew those investors in and added further leverage. Assets under management in these products crossed $50 billion in July. After the losses of recent days, top policymakers have apologized for the decision and called for a renewed ban on retail trading of the instruments.
The sell-off is a further sign that semiconductor and AI stocks are priced for flawless execution, leaving substantial downside if the sector's aggressive growth targets are not met. Hynix brought in a record 60.54 trillion won ($41.25 billion) operating profit, up 557% year-over-year, yet that figure fell short of the 64 trillion won analyst consensus.
Hyperscaler credit swaps reach a record 162bps
The uncertainty accruing in the sector has swept from equity into credit markets. Five-year credit default swaps on a basket of the five largest US hyperscalers — Amazon, Meta, Microsoft, Google and Oracle — have jumped from 115bps to 162bps in recent months and now sit at a record high. The market currently implies default odds of 12% for these companies within five years.
Sage Advisory said hyperscalers have more than doubled their collective dollar debt footprint since September to more than $360 billion as free cash flow turns negative. The biggest contributor to the credit risk is Oracle after its aggressive AI investments, because a significant percentage of its contract backlog is tied to OpenAI as a single customer, which has struggled to generate cashflow and delayed its IPO.
Combined 2026 capex guidance from Alphabet, Microsoft, Amazon and Meta is tracking toward $725 billion-$730 billion. Alphabet posted its first cash burn on record in the second quarter, at $5.9 billion, despite its cloud unit posting 82% growth. Meta is slated to report Q2 results later today after US markets close.
Source: Cointelegraph
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