The retreat of geopolitical premium is directing funds towards semiconductors and Asian chip makers, while the hawkish Federal Reserve is restarting interest rate repricing.

Written by: Zhang Yaqi

Source: Wall Street Journal

The narrative of artificial intelligence remains strong, but the market structure has quietly changed. Goldman Sachs' Chief Analyst Lee Coppersmith warns that the current market is simultaneously bearing higher long positions and higher levels of leverage, making the risk of volatility non-negligible.

According to Goldman Sachs' commodities brokerage data, the global hedge fund net leverage ratio has risen to a four-year high, with the increase over the past four weeks being the most intense in nearly five years, driven by large-scale net buying activities and daily mark-to-market appreciation of positions. Meanwhile, the implied volatility of large-tech stocks continues to expand, with the premium relative to the overall market increasing despite rising stock prices.

The crude oil market is also showing noteworthy signals. As a result of the Iran agreement, managed funds have net sold approximately $25 billion worth of oil over the past seven weeks, reversing almost all of the geopolitical premium in Brent crude oil; benefitting from last week's record short positioning, net long positions in the oil market have fallen below pre-war levels. Meanwhile, the hawkish stance of the Federal Reserve has replaced geopolitical tensions as the new source of uncertainty, leading to a repricing of front-end interest rates.

"June served as a reminder," Lee Coppersmith wrote, "even the strongest long-term themes do not trade in a vacuum." He emphasized that AI remains a long-term investment logic with the highest confidence from clients, but risks at the structural level are accumulating simultaneously.

Sharp Increase in Leverage, Intensified Pressure on Market Structure

The most noteworthy change within the market is not the fundamentals, but the market structure itself.

Goldman Sachs' commodity brokerage data shows that the global hedge fund net leverage ratio has reached a four-year high, and the slope of this round of increase is particularly steep—the increase over the past four weeks is among the largest single intervals in nearly five years. This trend is driven by two forces: net buying brought by proactive positions and daily mark-to-market appreciation generated as the market rises.

Alongside the increase in leverage, the volatility of large-tech stocks is experiencing structural expansion relative to the overall market. Lee Coppersmith points out that even during the continuous rise of stock prices, the volatility premium in the tech sector continues to amplify, signifying that the market has begun to charge a higher risk premium for structural vulnerabilities in pricing.

His conclusion directly points to the internal contradiction of the current market: heavier long positions, higher leverage, and rising volatility have thus become a systemic inevitability rather than an occasional event.

Record Short Positions in Oil Market, Macroeconomic Risks Return to Pricing

Another main storyline in June is the return of macroeconomic risks and the shift in pricing framework.

The realization of the Iran agreement effectively mitigated a potential inflation risk, with Brent crude nearly unwinding all of its previous geopolitical premiums. Managed funds have accumulated a net sell of about $25 billion in crude oil over the past seven weeks, with short positions reaching a historic high after last week's record building, and net long positions falling below pre-war levels. Lee Coppersmith cites Rob Quinn's observations, noting that investors' digestion speed of geopolitical risks has been unusually fast, with attention rapidly shifting towards interest rates and Federal Reserve policies.

However, the retreat of geopolitical premiums does not equate to a reduction in macroeconomic pressure. The hawkish stance of the Federal Reserve's FOMC statement has pushed front-end interest rates higher in a repricing, reigniting uncertainty in the market regarding policy paths. Lee Coppersmith specifically identifies the non-farm payroll data release day and FOMC meeting day as typical cases, indicating that the market needs to calibrate event-driven volatility premiums more cautiously.

Deepening Rotation in AI, Mag 7 Exposures Drop to One-Year Low

While market structure is tightening, the investment logic in AI itself remains unchanged—however, the way funds are allocated is quietly evolving.

This week, the core subject of discussion between Lee Coppersmith and clients is no longer "whether AI has peaked," but rather "how to hold AI exposure." Goldman Sachs data shows that capital expenditure expectations in the U.S. and Asia remain high, profit forecasts continue to be revised upward, and capital inflows into the U.S. tech sector have remained strong for several consecutive weeks.

Notably, funds are migrating from the Mag 7 to deeper layers of the AI ecosystem. Goldman Sachs' commodity brokerage data indicates that both long and short exposure in the Mag 7 have fallen to a one-year low, while overall exposure in the U.S. tech sector is nearing a five-year high. Fund flows are increasingly focusing on semiconductors and Asian chip manufacturers—the semiconductor sub-sector is expected to become the industry with the highest net purchases globally for the second consecutive year, with net allocation ratios rising to historical highs.

Some funds have also begun to spread towards financials, cyclical sectors, and Eurasian markets, but this spread is occurring without sacrificing AI allocations.

Leveraged ETFs Become Volatility Amplifiers, Particularly Notable in the South Korean Market

Systematic factors are playing an increasingly crucial role beneath the surface of market volatility.

Lee Coppersmith specifically points out one data point: in markets like South Korea, market makers' Gamma hedging rebalancing demand for leveraged ETFs can exceed 20% of the average daily trading volume on days of significant volatility. This means that the mechanical rebalancing of leveraged ETFs itself has become a structural source that reinforces upward market momentum while also amplifying downward volatility.

This mechanism, combined with high fund leverage rates, contributes to the underlying logic of the current market's volatility expansion: during an upward phase of stock prices, the two forces simultaneously elevate risk exposure; once the direction reverses, the same mechanism will accelerate in both directions.

Lee Coppersmith's final judgment is that while the long-term logic of AI remains unchanged and funds continue to flow in, June's market performance clearly demonstrates that when a powerful narrative encounters high-leverage structures, concentrated positions, and systematic amplification mechanisms, volatility becomes the norm even if the fundamentals remain unchanged.