Asia Stocks Steady as Chip Selloff Eases, Oil Down: Markets Wrap

Asian stock markets traded cautiously on Monday, with a significant downturn in South Korean shares and Japanese equities extending losses. Specifically, South Korea's KOSPI index closed down 4.5% after an earlier slide of as much as 5.1%, bringing its monthly losses to over 22% and entering a bear market. Japan's Nikkei 225 fell 4.03%. Conversely, Australia's ASX 200 managed a 0.30% gain. The MSCI Asia Pacific Index saw a 0.2% drop, while the broader MSCI Emerging Markets Index also fell 0.3%.

The volatility in Asian markets was driven by a combination of factors, including the unwinding of the AI trade, particularly impacting South Korean chipmakers, and escalating geopolitical tensions in the Middle East. The conflict led to a sharp increase in oil prices, with Brent crude climbing as much as 3.8% to trade above $91 a barrel, reaching its highest level since June. U.S. crude rose 2.1% to $84.18 a barrel, and Brent added 2.4% to $90.18 a barrel. This surge in oil prices rekindled inflation worries, prompting concerns about potential interest rate hikes, with futures markets now pricing in a 60% chance of a Federal Reserve rate increase as early as September.

Investor sentiment remained fragile due to these factors, alongside persistent questions about the sustainability of high valuations for AI and chip stocks. The Philadelphia Semiconductor Index, a key indicator for the sector, shed 10% last week and is now down 20% from its June record high. Analysts from Citi downgraded Korea to "neutral" from "overweight" in their EM country allocation, citing volatile trading conditions. The focus for investors is now shifting to upcoming quarterly earnings from major U.S. technology companies like Alphabet, Intel, and Tesla, which are expected to provide insights into the continued strength of AI-driven investment. Bank of America strategists anticipate S&P 500 earnings to exceed consensus by 5%, with overall growth projected at 28% year-over-year, and semiconductor companies alone expected to report around 130% earnings growth.