Fresh selling pressure on semiconductor stocks weighed heavily on Asian markets on Wednesday, reigniting doubts about the sustainability of the AI-driven trading theme. Concurrently, escalating Middle East tensions fueled a fourth consecutive day of gains for oil prices.
The South Korean Kospi index saw its losses deepen to over 7%, with SK Hynix Inc and Samsung Electronics Co Ltd contributing significantly to the decline. In Tokyo, shares of Kioxia Holdings Corp plummeted more than 13%, dragging the Nikkei 225 index down by as much as 3% at one point. This broad sell-off pushed the MSCI Asia Pacific Index 1.5% lower, ending its two-day winning streak.
Meanwhile, Brent crude oil extended its rally for a fourth day, breaking above $85.25 per barrel. The advance was driven by heightened concerns over potential energy supply disruptions in the Middle East following a new round of U.S. airstrikes on Iran.
The head of South Korea's Financial Services Commission stated that authorities would soon announce measures targeting leveraged exchange-traded funds (ETFs), addressing controversy that such products linked to Samsung and SK Hynix were amplifying stock market volatility. Separately, the Bank of Korea raised its benchmark interest rate by 25 basis points to 2.75%, a move that was in line with market expectations.
Chip Stock Selloff Intensifies, Testing AI Rally
The semiconductor sector remained under intense pressure, serving as the primary driver behind the day's broad market decline across Asia.
After months of substantial share price gains, investors are now demanding more concrete evidence that the surge in AI-related capital expenditure will translate into sustained profit growth across the entire semiconductor supply chain. A strategist noted that the tepid market reaction to ASML Holding NV's strong earnings report deepens a concerning trend, where robust preliminary results from Samsung and solid sales data from Taiwan Semiconductor Manufacturing Company (TSMC) have so far failed to bolster the increasingly fragile chip stock rally.
ASML had already raised its full-year sales forecast for the second time this year, and reports indicated plans to increase prices for its chip-making equipment. Despite this, the market response remained muted. TSMC, scheduled to report earnings later in the day, is seen as the next critical test for gauging the progress of AI infrastructure build-out. The strategist added that as Asia's most valuable company, TSMC faces extremely high expectations, and its ability to shift the broader regional market sentiment remains to be seen.
South Korean Market Triggers Circuit Breaker, Regulators Respond
The severity of the sell-off in South Korea activated market protection mechanisms. A more than 5% drop in Kospi 200 index futures prompted the Korea Exchange to trigger a "sidecar" circuit breaker, temporarily halting program trading for the Kospi.
Comments from the head of South Korea's Financial Services Commission reflected heightened regulatory vigilance over market volatility. Leveraged ETFs linked to Samsung and SK Hynix have recently been viewed as amplifying stock price swings, prompting authorities to pledge swift countermeasures. The Bank of Korea's decision to raise interest rates by 25 basis points to 2.75% on the same day matched market forecasts.
Middle East Tensions Fuel Oil Price Surge
Geopolitical risks emerged as another major theme propelling oil prices higher.
A temporary U.S.-Iran peace deal signed roughly a month ago has nearly completely broken down over the past week, with both sides disputing control over the Strait of Hormuz. A significant portion of energy exports from Saudi Arabia, Qatar, and the United Arab Emirates transit through this vital waterway. Statements indicated a commitment to intensify bombardment until Iran ceases attacks on ships in the Strait and agrees to keep the waterway open.
An Iranian military spokesperson stated that current actions are focused on destroying U.S. "offensive infrastructure" in the region, with further steps to follow. The spokesperson warned adversaries not to assume they can maintain the current combat posture and prolong the conflict into a war of attrition.
A market analyst commented that while the Federal Reserve faces no immediate pressure to hike rates, oil prices are the dominant factor from a longer-term perspective. The energy sector supported the market in June, but if the Strait of Hormuz remains closed, that support could quickly fade.
Softer Inflation Data Eases Rate Fears, Boosts Bonds
Amid the turmoil in equity and oil markets, bond markets found support from cooling inflation data.
U.S. producer price index (PPI) figures for June came in below expectations, pushing U.S. Treasury prices higher on Wednesday and leading traders to further scale back expectations for Federal Reserve rate hikes this year. This movement spurred gains in Australian and New Zealand government bonds as well. The yield on the U.S. two-year Treasury note retreated further from its recent highs.
The core dilemma facing markets lies in the divergence between near-term and long-term inflation pressures. Softer inflation data provides the Fed with room to pause, but the risk of persistently high energy prices due to worsening Middle East tensions could reopen the door to inflationary pressures over a longer horizon, complicating the monetary policy outlook once again.
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