Asian stocks initially saw gains, with MSCI Inc.'s gauge of Asian shares rising 0.9%, fueled by optimism surrounding Meta Platforms Inc.'s new AI agent and strong performance in the tech sector. Chipmakers like Samsung Electronics Co. and SK Hynix Inc. were key contributors, with South Korea's Kospi Index jumping 1.6% and Taiwan's stock index hitting an intraday record. This tech rally followed strong performances on Wall Street, where the S&P 500 and Nasdaq 100 posted their best days since early August.
However, this early momentum faded as the trading session progressed. A rally in technology stocks came to a halt as oil resumed its role in setting the tone for markets. Brent crude, after falling for four straight sessions, rose above $101 a barrel, heading for its first gain in a week. The swift pullback in risk appetite highlighted how confidence in the AI trade remains vulnerable to macroeconomic risks, with Treasuries falling and the dollar rising 0.2% as focus returned to inflationary risks from elevated energy costs. Analysts noted that sentiment remains very fragile, and the news on Meta's AI agent, while specific, doesn't change the broader narrative on AI and concerns about hyperscalers' capital expenditure, especially with rising oil prices fueling caution.
Investors are grappling with the threat of persistent inflation, as the "commodity shock has broadened," with oil products and agricultural prices significantly higher. This situation increases the likelihood of "second-round effects" and raises the bar for central banks to back away from a hawkish stance. Bond yields remain near their highest levels in years, as investors price in imminent interest-rate hikes and persistent fiscal shortfalls. Federal Reserve officials like Richmond Fed President Tom Barkin warned that inflationary shocks could take time to fade, while St. Louis Fed President Alberto Musalem suggested further hikes might be needed. The market was pricing in three more hikes.
Diplomatic efforts to end the US-Iran war are being closely watched, with President Donald Trump set to address the United Nations General Assembly and a possible meeting with his Iranian counterpart. Oil prices wavered amid proposals for reopening the Strait of Hormuz and Saudi Arabia's plans to resume operations on its East-West pipeline. The outlook for stocks hinges on whether diplomatic progress can push oil lower, easing inflation concerns and taking pressure off bond yields. Any setback risks reviving concerns over energy prices and the path for interest rates.
The initial tech optimism was also boosted by Alibaba Group Holding Ltd.'s announcement of China's most powerful AI chip, designed to compete with Nvidia Corp., and Tencent Holdings Ltd.'s launch of its latest image-generation model. Meta Platforms Inc. surged 11% and Advanced Micro Devices Inc. topped $1 trillion in market value on the back of strong demand for Meta's new AI chatbot, reinforcing confidence in the "AI trade" and the demand for semiconductors.
