Why Asian Markets Fell Unevenly on June 25: AI Profit-Taking, US-Iran Tensions, and Fed Rate-Hike Fears

The selloff intensified the next day. On June 26, the Kospi fell 8.2%, triggering a 20-minute program-trading halt — a circuit breaker designed to stem panic selling.

Why Hong Kong and Shanghai Bucked the Trend

While Japan and South Korea bled, Hong Kong's Hang Seng gained 2.1% and the Shanghai Composite edged higher. This divergence reflects three factors:

1. Chinese stimulus hopes — Investors in mainland and Hong Kong markets were supported by expectations that Beijing would step in with fresh stimulus to support the economy.
2. A rotation out of overvalued tech into cyclicals — Rather than a broad exit, some Chinese investors shifted capital from expensive AI shares into sectors like consumer staples and industrials.
3. Smaller AI-sector weighting — Chinese and Hong Kong benchmark indexes have fewer high-flying AI names than Japan or South Korea, making them less vulnerable to a tech-specific selloff.

The Hang Seng's gain on June 25 should be seen in context: it had fallen 1.9% on June 26 as the broader selloff deepened.

The US-Iran Ceasefire That Didn't Hold

Compounding market anxiety was a rapid unraveling of the US-Iran ceasefire. A fragile memorandum of understanding (MoU) signed on June 17 had called for a 60-day halt to military operations, including the reopening of the Strait of Hormuz. But within days, both sides accused each other of violations.

The spark: an Iranian drone struck a commercial cargo vessel in the Strait of Hormuz. News reports differ on the ship's exact name and flag — some sources describe it as a Panama-flagged vessel, while others identify it as the Singapore-flagged Ever Lovely. The US struck Iranian military sites in retaliation. Iran then launched missiles and drones targeting US facilities in Bahrain and Kuwait on June 27-28.

By June 28, the ceasefire was effectively dead. The US and Iran traded fresh attacks, and President Donald Trump ordered airstrikes on Iranian military targets, accusing Tehran of breaching the agreement. Iran's Revolutionary Guard claimed responsibility for attacks on the US Ali Al Salem airbase in Kuwait and the US Fifth Naval Fleet in Bahrain.

For Asian markets, the risk was clear: escalating Middle East hostilities threatened to disrupt oil shipments through the Strait of Hormuz (a chokepoint for about 20% of global petroleum), drive energy prices higher, and inject further uncertainty into an already nervous global outlook.

The Dollar and Fed Rate-Hike Expectations

A third force pushing Asian markets down was a rapidly strengthening US dollar, driven by surging expectations that the Federal Reserve would raise interest rates again.

On June 25, the dollar index hit approximately 101.4 — a 13-month high. The catalyst was a string of hot economic data that convinced markets the Fed had more work to do.

According to CME FedWatch data from June 23, markets were pricing a 69.5% probability of at least a 25-basis-point rate increase at the September FOMC meeting — up sharply from 29.1% just a week earlier. The Investing.com Fed Monitor showed a 67.9% probability of the federal funds rate reaching the 3.50-3.75% target range at the September 16 meeting. The probability fluctuated day to day: by June 27, estimates had moderated to around 50%.

A stronger dollar is typically negative for Asian equities because it:

• Makes dollar-denominated debt more expensive for emerging-market borrowers
• Pressures capital flows out of Asian markets and into US assets
• Hurts Asian exporters whose goods become more expensive in dollar terms

Putting It All Together: Three Pressures, One Divergent Day

The June 25 selloff was not a simple risk-off day. It was the product of three distinct pressures that hit different markets with different intensity:

An important caveat: The Kospi's 7.7% drop on June 25 was followed by an even steeper 8.2% crash on June 26, which triggered a 20-minute trading halt. The selloff clearly accelerated the day after the initial plunge. The 7.7% figure is broadly consistent with the magnitude of the Kospi's collapse that week, but it was not the single worst day.

What Investors Should Watch Next

For anyone tracking Asian markets, three variables remain in focus:

1. The AI trade — After a year of extraordinary gains in AI-linked stocks, the June selloff suggests valuations may have gotten ahead of fundamentals. If the rotation out of tech deepens, South Korea and Japan are most exposed.
2. The Middle East — The US-Iran ceasefire is effectively in tatters. Any further escalation that disrupts oil shipments through the Strait of Hormuz would hit Asian net oil importers like Japan, South Korea, and India especially hard.
3. The Fed — Rate-hike probabilities are fluctuating daily. A decisive move in either direction (a hawkish surprise or a dovish pivot) would ripple through Asian currencies and equities.