Asian markets extend rout as AI valuation fears deepen

Asian stock markets plunged for a second straight day on Wednesday as deepening anxiety over the sustainability of AI-related spending sent chipmakers into freefall, erasing billions in market value and triggering a trading halt in South Korea ahead of pivotal U.S. tech earnings and a Federal Reserve policy decision.

Regional Rout Widens

South Korea's Kospi, which had more than tripled over the 12 months to June, sank over 11% to its lowest level since early April, following a drop of more than 10% on Tuesday, according to Reuters. Taiwan stocks fell 5%, while Japan's Nikkei 225 slid 2.6% as the rout spread across the region. MSCI's broadest index of Asia-Pacific shares outside Japan dropped more than 2.45%, adding to a 3.6% slide a day earlier. SoftBank shares fell 10%, according to CNBC. Hong Kong's Hang Seng bucked the trend, rising 1.4%.reuters+1

SK Hynix shares fell 9% on Wednesday even after reporting quarterly operating profit more than six times higher than a year earlier, as the results missed elevated market expectations. Reuters reported the company's quarterly revenue rose 257%, but investors were looking for stronger signals on long-term agreements and shareholder returns. Gary Tan, portfolio manager at Allspring Global Investments, said the results were strong but "insufficient for current market demands," describing the memory sector as "the epicentre of the AI trade".reuters

Big Tech Earnings in Focus

Attention now turns to earnings from Microsoft ↗ 0.52% and Meta ↗ 1.02% later Wednesday, seen as a critical test of the AI trade following disappointing cash flow reports last week from Alphabet ↘ 3.58% and Tesla ↗ 0.32%. Sean Teo, sales trader at Saxo in Singapore, said this earnings round would need to demonstrate that heavy capital expenditure has paid off, or risk "dragging the market further." He added that investors are growing wary of "circular financing arrangements, where companies invest in one another in a closed loop that obscures genuine demand".

The selloff showed signs of spreading beyond Asia, with Nasdaq futures down 0.7% and European futures down 0.6% during Asian trading hours.

Fed Decision Looms

The Federal Reserve's policy decision, due later Wednesday, adds another layer of uncertainty. The central bank is widely expected to hold rates steady, though traders are pricing in a 33% chance of a rate hike under the no-guidance approach adopted by Fed Chair Kevin Warsh. Frank Flight, head of macro strategy at Citadel Securities, said the market "may be underestimating the extent of a hawkish shift at the Fed," arguing that a moderate rise in energy prices tied to renewed Middle East tensions could tip a "finely balanced meeting toward a rate hike".