Asia shares subdued, bonds swamped by AI debt wave

Asian shares declined on Thursday, as strains in sovereign bond markets were exacerbated by reports that major tech companies were seeking billions in debt to finance AI chips. Elevated oil prices further pressured Treasuries, while a robust auction of US 10-year bonds briefly lifted yields off 24-year peaks. The strong dollar weighed on the euro, which fell to near 17-month lows amid concerns about France's finances and their potential contagion to Italy and Greece.

This surge in borrowing costs cast a shadow over equities, with Japan's Nikkei slipping 0.9% and South Korea down 0.6%. MSCI's Asia-Pacific index outside Japan also fell 0.1%. On Wall Street, S&P 500 and Nasdaq futures showed minimal movement, while EUROSTOXX 50, DAX, and FTSE futures edged up by 0.1% each after a downward trend on Wednesday.

Media reports suggested that SpaceX, Broadcom, and Oracle were raising capital to purchase AI chips. Broadcom aimed for $50 billion in financing, SpaceX planned to issue $30 billion in investment-grade debt and $10 billion in loans for Nvidia chips, while the latter's stock and bonds experienced a decline. Nigel Green, CEO of deVere Group, cautioned that this AI investment boom might transition from cash to credit, altering risk profiles for global investors.

Debt, he noted, must be repaid on schedule regardless of incoming revenues. This debt is now entwined in bond funds and pension portfolios worldwide. Despite potential earnings boosts for semiconductor and memory sectors due to AI equipment purchases, sovereign bond markets faced inflation fears, budget deficits, and rising interest rates.

Federal Reserve minutes revealed most members anticipated another rate hike by year-end, with an 80% expectation of a December increase. A potential pause in tightening lifted 2-year Treasury yields to 4.78% and 10-year yields to 5.298%, up from a 24-year high of 5.326% the previous day. France's economic struggles were evident as the Bank of France head acknowledged serious conditions, yet downplayed the need for ECB assistance.

This resulted in euro depreciation against the dollar, reaching an 18-month peak of $1.1198. Energized commodity markets saw Brent futures rise 0.9% to $101.14 per barrel, US crude futures climbed 0.8% to $89.02 per barrel, and gold's non-interest-bearing price tumbled to $4,105 an ounce, nearing two-month lows.