One of the most turbulent trading days of the year was recorded yesterday in Asia, as a sharp selloff in technology and artificial intelligence stocks led to steep declines across the continent.
The hardest hit was recorded in South Korea, where the KOSPI index plummeted by nearly 10% during trading and triggered a "circuit breaker" mechanism twice on the same day, a relatively rare event indicating the intensity of the market pressure.
The declines in Asia did not come out of nowhere. They continue a trend that began on Wall Street, where megacap technology stocks led the losses in recent days. Investors, who enjoyed sharp gains in stocks tied to artificial intelligence, began taking profits amid concerns that US interest rates will remain higher for longer than expected.
Nasdaq futures are plunging by more than 2% before the US market open as of this writing, while S&P 500 futures are down about 1.2%. SpaceX stock, which became one of the stars of the recent AI wave, also completed its third consecutive day of declines, following a successful IPO and a surge of tens of percent in the initial days.
The focus of investors is now shifting to the financial reports of major chip companies, led by Micron and Cerebras Systems, which could provide an indication regarding the state of demand in the artificial intelligence sector.
The Fed still troubles the markets
Another factor weighing on sentiment is the American central bank. The Federal Reserve, which began to be led by a new chairman, Kevin Warsh, signaled last week that it is in no hurry to lower interest rates, and investors began to reduce estimates for significant rate cuts during the year.
Markets are now awaiting the PCE data, the Fed's preferred inflation gauge, which will be published later this week. A higher–than–expected figure could further reinforce fears that interest rates will remain at high levels. For technology stocks, and especially AI companies trading at exceptionally high multiples, this is a less comfortable environment.
On the other hand, there is also positive news providing a tailwind for the markets. The talks between the US and Iran held in Switzerland over the weekend showed initial signs of progress, reducing fears of further disruptions to oil supply through the Strait of Hormuz.
As part of the efforts to promote an agreement, the US even granted certain relief allowing the sale of some Iranian oil in international markets. Following the developments, the price of oil fell by more than 3% in the previous trading day, with Brent crude now trading around $78 a barrel.
However, investors are still not convinced that the agreements will hold over time, and the gaps between the parties remain significant.
Despite the intensity of the declines, most analysts do not believe this is the end of the AI trend. Following gains of hundreds of percent in some stocks over the past year, many view the current move primarily as natural profit–taking. At the same time, high valuation levels and continued uncertainty surrounding interest rates, inflation, and the geopolitical situation could continue to lead to sharp volatility in the coming weeks.