Asia shares subdued, bonds swamped by AI debt wave

Asian shares fell on Thursday as rising concerns in sovereign bond markets, fueled by reports that major tech firms like SpaceX, Broadcom, and Oracle were seeking billions in debt to secure AI chips. The surge in oil prices further strained Treasury markets, although a successful auction of U.S. 10-year debt helped lower yields from their 24-year peaks.

While high yields bolstered the dollar, the euro slipped to near 17-month lows amid worries about France's financial health, which trickled down to Italy and Greece. This credit crunch put pressure on equities, causing Japan's Nikkei to drop 0.9% and South Korea to decline 0.6%. MSCI's Asia-Pacific index outside Japan slipped 0.1%.

On Wall Street, S&P 500 and Nasdaq futures showed minimal movement, while European futures rebounded slightly after a Wednesday dip. Reports stated SpaceX, Broadcom, and Oracle were in the midst of raising funds to acquire AI chips, with Broadcom seeking $50 billion, SpaceX planning $30 billion in investment-grade debt and $10 billion in loans for Nvidia chips, and SpaceX's share and bond prices plummeting.

Credit default insurance on SpaceX hit record highs, and its shares and bonds suffered losses. Nigel Green, CEO of deVere Group, warned that this AI boom may spiral into a debt trap, where Nvidia could be financing its own customers, leaving global investors vulnerable if profits don't materialize. Green emphasized that the debt would have to be repaid regardless of revenue, changing the risk profile entirely.

Billion-dollar debt is now flowing into bond funds and pension pots worldwide. Despite the rising debt costs, Samsung Electronics projected a 783% surge in third-quarter operating profit to 107.4 trillion won, though its shares fell 0.3%. As inflation fears, budget deficits, and rising interest rates stress sovereign bond markets, the Federal Reserve hinted at potential rate hikes, with a 19% chance this month and an 80% probability by December.

Analysts at Goldman Sachs expect a second Fed hike in December, though they also believe the Fed might ultimately decide tighter monetary policy is unnecessary. The 2-year Treasury yield settled at 4.78%, while the 10-year yield rose to 5.298%, rebounding from a 24-year high of 5.326%. France's bond market turmoil prompted its Bank of France head to warn of the country's dire economic situation, but he reassured investors that Paris wouldn't seek assistance from the European Central Bank.

As a result, the euro slid, trading at $1.1198, down 0.6% from the previous day's close. The dollar gained strength, reaching an 18-month high of 102.22. Crude oil prices also climbed, with Brent futures up 0.9% to $101.14 a barrel, and U.S. crude increasing 0.8% to $89.02 a barrel. Gold's non-interest-bearing price fell to $4,105, hovering near two-month lows.