Stocks fall as AI sell-off goes global, yen surges

Equities in Asia declined as investors began pulling back on the artificial intelligence frenzy that powered the bull market in 2024. The yen rose for a fourth day ahead of the Bank of Japan (BOJ) meeting later in July.

The MSCI Asia-Pacific Index declined 1.6 per cent, the most in nearly two months, as Japan’s Nikkei 225 Stock Average headed for a technical correction.

South Korea’s benchmark lost nearly 2 per cent, with chipmaker SK Hynix tumbling as much as 8.9 per cent even after an earnings beat. In the US, the S&P 500 slumped 2.3 per cent, its worst showing since December 2022.

“There seems to be a broad reassessment on the cost and benefit calculus for the artificial intelligence ecosystem,” said Lombard Odier Singapore senior macro strategist Homin Lee. “Anxieties about consumer demand are also persisting due to hints of softening data in the US. These worries could prove temporary in the end, but a collective reappraisal by investors is natural after such a furious rally.”

The yen climbed 1 per cent against the dollar for a second day.

The Japanese currency has been trading at the strongest levels relative to the greenback since May, as traders start positioning for a potential policy rate hike by the BOJ.

“Unease among yen bears is deepening, with Japanese monetary policy possibly tightening next week, in contrast to coming rate cuts by the US Federal Reserve and the European Central Bank,” said DBS Bank macro strategist Chang Wei Liang. “Further yen strength into the BOJ meeting next week cannot be discounted.”

Former New York Fed president William Dudley called for lower borrowing costs – preferably at July’s gathering.

For many analysts, such a move would be worrisome, as it would indicate officials rushing to avoid a recession.

Later on July 25 in the US, investors will see further evidence of the health of the economy, with US gross domestic product and initial jobless claims data being released.

In Asia, the People’s Bank of China cut its medium-term lending facility rate to 2.3 per cent from 2.5 per cent on July 25, following a surprise reduction to a key short-term rate to boost slowing economic activity.

The nation’s 10-year bond futures were steady. Stocks in Hong Kong and the mainland fell.

In the Philippines, the nation’s central bank suspended currency trading for a second day due to Typhoon Gaemi.

Taiwan’s market remained closed due to Gaemi, meaning Asian chip heavyweight Taiwan Semiconductor Manufacturing Co was not trading again on July 25.

An index of dollar strength was little changed on July 25, after a similarly flat July 24.

Big Tech pullback

The tech-heavy Nasdaq 100 fell 3.7 per cent, weighed down by its largest constituents. Alphabet slid 5 per cent, with spending higher than analysts expected, while Tesla’s robotaxi delay spurred a 12 per cent stock plunge.

Treasuries rallied in Asian trading after the bond curve steepened in the previous session on bets the Fed is close to cutting rates.

After driving the rally in stocks for most of 2024, Big Tech slammed into a wall. Traders rotated from megacaps to lagging parts of the market, spurred by bets on Fed rate cuts and concern artificial intelligence still needs to pay off.

“Tech’s problem isn’t just that earnings are less than perfect, but that the group is still caught up in the violent rotation trade that kicked off with the June consumer price index,” said Mr Adam Crisafulli from Vital Knowledge.

“Many assumed the anti-tech rotation would be ephemeral, and the fact it’s proving durable is compounding anxiety towards the group and spurring additional selling pressure.”

The drubbing in these stocks has seen some of the air come out of valuations.

While that is something that could argue in favour of dip buying, the earnings season is just getting started. Apple, Microsoft, Amazon.com and Meta Platforms are all due to report results next week.

Oil fell, joining a broad retreat in commodities, as a soft economic outlook for China outweighed lower US stockpiles.

Gold extended losses from July 24. Digital assets, such as Bitcoin and Ether, also slid. BLOOMBERG