Investors increasingly seek signs that AI spenders can justify the billions of dollars poured into the technology
ASIAN equities declined on Tuesday (Jul 27) as renewed concerns over artificial intelligence spending fuelled another sell-off in chipmakers.
MSCI’s Asia-Pacific equity gauge fell 1.9 per cent, with chip majors SK Hynix and Samsung Electronics contributing the most to the decline.
The Kospi Index in South Korea – a bellwether for AI investments – tumbled 7.1 per cent, while the Nikkei 225 Stock Average lost more than 3.5 per cent after a Wall Street gauge of semiconductor stocks sold off for a third day.
As at 9.43 am Tokyo time, S&P 500 futures were little changed, while the Hang Seng futures rose 0.3 per cent, the Nikkei 225 futures (OSE) fell 3.9 per cent, Japan’s Topix fell 2.6 per cent and Australia’s S&P/ASX 200 fell 0.1 per cent.
SK Hynix, whose American depositary receipts slipped below their initial public offering price, slumped almost 10 per cent, while Samsung lost more than 8 per cent.
Japanese semiconductor stocks such as Tokyo Electron and Disco also tumbled in excess of 9 per cent as investors increasingly question the spending spree in the sector after a sharp runup in shares this year.
“Investors are clearly not yet ready to brush aside concerns over the AI sector,” said Hebe Chen, a senior market analyst at Vantage Global Prime.
“The latest sell-off in chipmakers shows that doubts over spending, returns and valuations are still deepening rather than fading.”
Elsewhere, Brent extended Monday’s biggest decline in more than three months, falling another 1 per cent to about US$87.60 a barrel, as the US d daily strikes against Iran and US President Donald Trump said there’s a “good chance” of an Iran deal.
Treasuries gained for a second day as inflation fears eased. The yield on the benchmark 10-year declined two basis points to 4.63 per cent.
Alongside geopolitical developments, investors face a packed week of risk events, with policy decisions from the US Federal Reserve, Bank of Japan and Bank of England, as well as earnings from megacap technology companies.
Investors are increasingly looking for signs that the biggest spenders on AI can justify the billions of dollars they have poured into the technology.
“This is a week with more than its fair share of potential surprises, good and bad,” said Chris Larkin at E*Trade from Morgan Stanley.
“Geopolitics and oil prices may be the biggest wild cards, but a bullish response to strong Magnificent Seven earnings isn’t a given, especially if AI spending levels continue to raise eyebrows.”
Chip companies remained in focus during the US session, with the Philadelphia Semiconductor Index dropping 2.2 per cent. Sandisk, Advanced Micro Devices and Nvidia were among the S&P 500’s biggest decliners.
The cost of protecting Nvidia’s debt against default surged amid a round of AI deals worth more than US$750 billion.
ASML Holding sank on a report that a Chinese state-backed firm is producing certain chipmaking machines that may threaten its sales.
Traders’ attention will be on a slew of earnings later this week, with more than 170 companies in the S&P 500 set to report. AI spending is in sharp focus after last week’s sell-off in shares of Alphabet.
Microsoft, Meta Platforms, Apple and Amazon are among the companies reporting this week. In Asia, SK Hynix and Samsung will announce earnings.
“Those companies embody the critical theme weighing on sentiment in the markets right now – excess capital expenditure and spending by AI companies that, investors fear, will eat into returns,” Kyle Rodda, a senior analyst at Capital.com, wrote in a note to clients.
Elsewhere, the policy announcement by the Fed on Wednesday is in sharp focus. Traders continued to see a roughly one-in-three chance of a rate hike.
Citadel Securities expects the Fed to raise rates this week – a surprise move strengthening chairman Kevin Warsh’s credibility in the battle with inflation.
A quarter-point increase on Wednesday would reinforce Warsh’s repeated pledge to restore price stability while showing policymakers no longer rely on signalling every policy move well in advance, Frank Flight, the firm’s head of macro strategy, wrote in a note.
On the geopolitical front, Trump said the US and Iran were engaged in diplomatic talks to end their conflict, but warned the two sides would return to fighting if negotiations did not yield a deal.
Separately, Iran and Oman are trying to reach an agreement to restart shipping through the Strait of Hormuz, according to people familiar with the matter.
“The only reason they want to meet is because we’ve been hitting them very hard,” Trump told reporters. “There’s a good chance that something could happen. If it doesn’t, we go back to doing what we were doing.” BLOOMBERG
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