Asian stocks displayed mixed performance on Wednesday, with key indices like South Korea's KOSPI experiencing significant declines. The KOSPI fell as much as 11% on Tuesday and another 6% on Wednesday, reaching its lowest level since early April. This volatility is largely attributed to investor concerns over AI valuations and the massive spending required, especially after companies like Alphabet and Tesla reported negative cash flow. Japan's Nikkei also saw a 2.6% slide on Tuesday and a further 1.5% drop on Wednesday, placing it on course for a 10% monthly decline.
The decline intensified across the region, with MSCI's broadest index of Asia-Pacific shares outside Japan falling over 2.45% on Wednesday after a 3.6% drop on Tuesday. Chipmakers were particularly hard hit; SK Hynix shares fell 9% despite reporting a more than sixfold increase in quarterly operating profit, as results still missed lofty expectations. This indicates that even strong performance is not enough for the current AI-driven market, according to analysts like Gary Tan of Allspring Global Investments.
The market movements also come ahead of crucial earnings reports from major tech firms and a surprise interest rate hike by the U.S. Federal Reserve. The Fed's "no-guidance regime" under new Chair Kevin Warsh made the decision unusually difficult to predict, with traders initially pricing in only a 33% chance of a hike. However, Frank Flight, head of macro strategy at Citadel Securities, stated that "we now see a rate hike at the July meeting," suggesting the market might be underestimating the Fed's hawkish shift, especially with moderate increases in energy prices. This led to the U.S. dollar reaching a one-month high.
Separately, U.S. markets also saw declines, with the Dow Jones Industrial Average falling 2.2% to 51,594.86, the S&P 500 dropping 1.5% to 7,316.39, and the Nasdaq Composite down 1.7% to 24,442.94. Treasury yields reacted to the Fed's decision and inflation concerns, with the 2-year Treasury yield falling 3.52 basis points to 4.242% and the 10-year notes rising 7.53 basis points to 4.679%. Fed funds futures traders are now pricing in 60% odds of a September rate hike.
