Asian markets showed mixed performance, with AI-related stocks facing significant pressure due to growing concerns over potential overcapacity and competition. This pullback was particularly evident in South Korea, where chipmaker stocks initially saw declines before buyers later stepped in. The broader MSCI Asia-Pacific index, excluding Japan, initially fell before recovering to gain 1.3%, reversing two days of losses. This volatility in AI stocks prompted a re-evaluation of the sustainability of the AI-driven rally that has propelled global markets throughout the year.
The Federal Reserve's rate hike outlook also heavily influenced market sentiment. A softer-than-expected US jobs report for June, which showed job growth slowing sharply and previous months' payroll gains revised lower, led traders to pare back expectations for imminent rate hikes. The unemployment rate dropped to 4.2% from 4.3% in May, but this was attributed to workers leaving the labor force, pushing the participation rate to a five-year low. This data reinforced the view that the Fed could afford to be patient on interest rates, with the CME Group's FedWatch tool showing a 46.8% probability of rates remaining steady in September, up from 35.8% previously.
Despite the AI sector's struggles, regional activity gauges, such as Purchasing Managers' Index (PMI) data released on Friday, indicated an economic expansion across Asia in June. Japan's services sector returned to expansion, and China's services activity grew, albeit at a slightly slower pace, with overseas demand picking up at its fastest rate in 20 months. Gold prices reacted positively to the US jobs data, rising 1.4% and trading around $4,125 an ounce, as reduced rate hike expectations made the non-yielding asset more attractive. Brent crude futures also saw an increase.
