Asia markets extend US sell-off as Nvidia’s post-earnings rally fizzles, AI bubble fears return

SINGAPORE - Volatility resurfaced on global stock markets with tech stocks hammered alongside cryptocurrencies amid an unwinding in speculative areas of the market just as worries grow about the Federal Reserve’s ability to cut interest rates.

Amid the de-risking, the S&P 500 fell 1.6 per cent on Nov 20, erasing US$2.7 trillion (S$3.5 trillion). The Nasdaq 100 lost 2.4 per cent as Nvidia erased a more than 5 per cent advance to sink 3 per cent. Wall Street’s closely watched gauge of stock volatility – the VIX – topped 26. Bitcoin sank below US$87,000 for the first time since April.

The sell-off spread from Wall Street to Asia on Nov 21, as renewed concerns over the artificial intelligence sector prompted investors to pull back from riskier assets.

The Kospi Index – a poster child for AI exuberance – sank as much as 4.1 per cent and is poised for its worst week since early March, while Japan’s Nikkei tumbled 2 per cent. 

Singapore’s Straits Times Index was down 0.7 per cent at 9.29am.

In New York overnight, Interactive Brokers strategist Steve Sosnick was on a call being asked about the rebirth of stock-market enthusiasm in the wake of a good report from Nvidia. His counterpart asked if he really thought that a break in Bitcoin could affect the entire US stock market. And he said: “Unfortunately, yes.”

“It’s become such a proxy for speculation that I can’t be the only person using it as a signal,” he noted. “For better or worse, I was proven correct. As a long-time systematic trader, it tells me that algorithms are acting upon the relationship between stocks and Bitcoin.”

Meantime, investors remained unsure about the Fed’s scope for policy easing after a mixed – and stale – jobs report. That is not to mention the continued raft of Fed speakers showing apprehension about further rate cuts.

To be fair, bond traders slightly boosted bets that the Fed will lower borrowing costs after the data. But the odds remain slim. Treasury two-year yields slid five basis points to 3.54 per cent. The US dollar hit a six-month high.

“Macro headwinds haven’t magically disappeared,” said Mr Fawad Razaqzada at City Index. “With earnings season essentially behind us, investors don’t have many fresh catalysts to prove that tech demand outside Nvidia is equally resilient. That limits the upside for broader indices.”

To Mr Adam Phillips at EP Wealth Advisors, investors are becoming reacquainted with the laws of gravity after enjoying a sustained rally in equities over the past several months. 

“We may have further to go, but we view this as a healthy retracement that suggests investors are paying attention to the risks in the current environment,” he said.

Mr Phillips does not see signs of an AI bubble forming, though he is mindful of the “lofty expectations” now embedded in many AI names with stretched valuations and heavy infrastructure spending.

“Our overall stance on equities remains neutral, and we’re positioned for broader market participation in the coming months,” he noted.

The renewed tech slide comes at a time when investors have grown concerned about valuations, the circular nature of financing on AI deals and the vast sums being spent on infrastructure without much to show for it.

“Let’s face it, most of the recent consternation surrounding the AI industry has little (if anything) to do with demand for AI chips,” said Mr Matt Maley at Miller Tabak. “The concerns have really surrounded the question about whether the buyers of these chips are going to make the kind of profits from their massive spending, which the stock market has been pricing in for many months now.”

“Nvidia delivered what the market needed, but the deeper questions haven’t gone away – from whether megacaps can monetise their massive AI capex to how sustainable debt-fueled spending really is,” said Ms Dilin Wu at Pepperstone Group.

To Adam Crisafulli of Vital Knowledge, everything comes back to AI. 

“AI is the single most-powerful force in the entire market,” he said. “And the poor price action in AI-linked stocks over the last 2.5 weeks was NOT because of any doubt about near-term data center trends – everyone knew infrastructure spending is still extreme. Therefore, Nvidia’s report was hardly dispositive as far as quieting the skeptics.”

Even Nvidia’s upbeat report has not been enough to reverse recent market headwinds, noted Mr Dennis DeBusschere at 22V Research. 

“Over the past two weeks, internals have been tilted risk-off with low volatility taking leadership across all market caps,” he said.

At Citadel Securities, Mr Scott Rubner pointed to a key group he is watching: systematic investors. 

These funds, which adjust exposure mechanically based on price trends and volatility, have “clearly entered a de-risking phase”, reducing their equity holdings into the recent weakness. To Mr Rubner, those mechanical outflows are likely to stay heavy over the next few days, then fade away completely.

It is not the time to bet against the biggest US technology names, according to short-seller Carson Block, even as warnings rise about a potential bubble in artificial intelligence.

“I would much rather be long than be short in this market,” Mr Block, chief executive of Muddy Waters Capital, said in an interview on Bloomberg Television. “If you’re out there trying to short Nvidia or any of these big tech names, you’re not going to be in business very long.”

“With Nvidia earnings now behind us and the Fed unlikely to cut in December, investors are left questioning what remains to drive a year-end rally,” said Mr Chris Murphy at Susquehanna International Group. “High-valuation leaders from earlier this quarter” retraced alongside Bitcoin, “underscoring a risk-off tone in speculative assets”.

Also not helping sentiment was a dated snapshot of the labour market that likely does not change much for Fed officials, many of whom were already leaning away from cutting rates again next month.

US job growth topped expectations in September but the unemployment rate continued its march higher, underscoring the lingering fragility of the labour market. Separate data showed US initial jobless claims fell to 220,000 last week, indicating that employers are largely still holding onto current workers despite economic uncertainty.

To Mr Kay Haigh at Goldman Sachs Asset Management, a December cut remains possible given continued labour market softness as expressed by the unemployment rate. Meantime, Mr David Russell at TradeStation says that with November’s jobless claims showing the labour market is still healthy, it suggests the Fed has little reason to cut rates next month.

The jobs report is a “non-event to markets given how stale the data is, but not to the Fed – this report is yet another call for a status quo period for the US central bank”, said Dr Florian Ielpo at Lombard Odier Asset Management.

Although the September numbers were stronger than expected, the overall state of the US labour market remains weak, according to Dr Eugenio Aleman at Raymond James.

“We expect the number of jobs for October to be negative due to a large number of federal workers dropping out of the payroll during that month, he said. “All this will make the December decision by the Federal Reserve even more difficult and thus could push members to pause until they have a clearer view on the labour market.” BLOOMBERG