Asian equities declined broadly, primarily driven by a sharp sell-off in semiconductor stocks. South Korea's Kospi Index plunged 6%, with major losses seen in SK Hynix Inc. and Samsung Electronics Co. Japan's Nikkei 225 Stock Average also fell 3%, dragging MSCI’s Asia Pacific equities gauge down by 1.2%. This decline was attributed to growing investor skepticism about whether the artificial intelligence rally, which had led to significant gains in chip stocks, could justify their high valuations, especially as the earnings season puts these valuations to the test. Despite a 60% surge in the Kospi this year, analysts like Suresh Tantia of UBS Global Wealth Management view this as a "mid-cycle digestion" and anticipate profit-taking after such a strong rally.
The volatility in the South Korean market was exacerbated by leveraged exchange-traded funds (ETFs) tied to Samsung Electronics and SK Hynix, introduced just two months prior. These ETFs, which multiply daily stock movements by two, are facing potential measures from Korea's Financial Services Commission due to their role in intensifying market swings. Adding to the market's unease were geopolitical tensions, with the US intensifying airstrikes against Iran, leading to renewed concerns over energy supplies and an earlier dip in Brent crude to $84.50. However, sentiment saw some stabilization as Taiwan Semiconductor Manufacturing Co. (TSMC) reported stronger-than-expected earnings, hinting at continued demand for AI infrastructure.
Meanwhile, softer US inflation data eased concerns about immediate Federal Reserve rate hikes, with markets pricing out the risk of a rate hike this month to just 10%. Despite this, bond yields rose due to geopolitical factors. Oil prices remained volatile; Brent crude initially erased gains triggered by US airstrikes on Iran to $84.50 but then rose to $85.45 a barrel, adding to a 12% gain for the week amidst heightened Middle East hostilities and Washington's continued strikes on Iran. Overall, the market remains focused on the durability of the AI rally and geopolitical developments, with expert John Woods of Lombard expressing concerns about speculative frenzy and excess leverage in the market not ending well.
