Asian stocks struggled for direction on Thursday, nursing steep losses for the week on mounting investor jitters around the AI trade, while a divided Federal Reserve kept interest rates steady, leaving bond markets questioning where rates are headed.
Brent futures slipped below $US90 ($A130) per barrel, after jumping over 7 per cent a day earlier as fighting in the Middle East escalated, although data showed tankers continued to make their way out of the region despite the continued missile and drone strikes.
The dollar was on the defensive after the US central bank held steady although the split decision left investors confused on whether the Fed will see through rate hikes to combat inflation. Yields on longer-dated US Treasuries rose to 19-year highs.
Asian chipmakers have been the centre of attention this week after a deep selloff in South Korean stocks that wiped more than $US2 trillion ($A2.9 trillion) from the country’s equity market rocked markets and investors fretted about the returns from massive AI spending.
The KOSPI rose 4.0 per cent in choppy trading on Thursday, but is staring at a 12 per cent weekly decline that prompted Finance Minister Koo Yun-cheol to apologise for the introduction of single-stock leveraged ETFs.
“Given that the fundamental thesis remains intact, there does appear to be an irrational, panic-like element to the current selling,” said Gina Kim, portfolio manager for emerging market equities at Nordea Asset Management in Singapore.
“I cannot comment on when the panic will stop as such but some indicators to look out for would be margin balances in both Taiwan and Korea for retail investors. Both are declining but we would ideally need to see some levelling off,” said Kim.
Chipmaker Samsung Electronics said its operating profit jumped 19-fold to a record in the second quarter, helping lift beaten-down investor sentiment.
MSCI’s broadest index of Asia-Pacific shares outside Japan rose over 1.0 per cent in early trading. Japan’s Nikkei was 2.0 per cent higher, but set for a 3.0 per cent drop in the week.
Earnings from US megacaps Meta and Microsoft outlined the contrasting fortunes of the companies that are able to showcase their ability to generate cash even as they spend to build out AI infrastructure.
Microsoft said it expects to keep generating cash through the fiscal year 2027 that just started, lifting its shares, while Meta reported a 91 per cent drop in second-quarter free cash flow, sending its stock down.
Nasdaq futures rose 1.2 per cent in Asian hours while European futures were 0.3 per cent higher.
In a post-meeting media conference, Fed Chair Kevin Warsh vowed to contain inflation but declined to offer any guidance on what action would be needed by the central bank.
Warsh noted that bond yields since the Fed’s last monetary policy meeting had risen notably — investors have priced in interest rate increases — and he welcomed that move, even while saying it did not mean the central bank needed to ratify it with action.
Yields on 30-year US bonds were at 5.2039 per cent, having hit their highest since June 2007 at 5.2273 per cent late in New York trading.
“What we heard was a fairly defiant message about bringing inflation back to target, albeit with very little substance on exactly how that would be achieved,” said Chris Weston, head of research at Pepperstone.
Fed funds futures now implied around a 60 per cent chance the Fed would lift rates at its next meeting in September and had 33 basis points of tightening priced in by year-end.
“The Fed is likely to face ongoing questions around its credibility,” said Kerry Craig, global market strategist at J.P. Morgan Asset Management.
“The gap between the Fed’s rhetoric and its actions may pose a challenge for market pricing. A new chair faces a divided committee and a bond market that’s starting to question the central bank’s resolve.”
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