Tech stocks struggle on AI spending worries, elevated yields

Asian markets experienced a drop on Friday, with a potential second weekly decline on the horizon, as investors grappled with concerns over higher energy prices, bond market instability, and the substantial investments necessary for AI development. Brent crude futures surged to $103.70 per barrel following a more than 4% increase the previous day, driven by worries surrounding the Middle East conflict and the subsequent global inflation surge.

President Trump stated on Thursday that the US would refrain from attacking Iran prior to the November midterms, though traders remained doubtful about any advancements towards ending the conflict. The primary concern for markets lies in whether Trump will adhere to his promise if Iranian actions escalate, as per Nick Twidale, chief market strategist at ATFX Global.

Any hint of a change in White House military strategy could trigger a sharp rise in oil prices, particularly given the already strained tanker traffic through the Strait of Hormuz. MSCI's Asia-Pacific index, excluding Japan, declined 0.16%, setting the stage for an over 1% weekly decrease. Tech stocks drove Wall Street's major indexes lower overnight after OpenAI disclosed that its annualized revenue was $20 billion lower than initially announced, causing market sentiment to wobble.

Tech, AI infrastructure, and semiconductors markets were in a downward spiral, with the OpenAI revelation acting as a catalyst for investors to reassess their exposure. For now, the market suggests that investors are becoming more discerning about where to invest and the price they are willing to pay for future growth. AI bond binge Investors were also scrutinizing a substantial fundraising effort, with SpaceX, Broadcom, and Oracle all anticipated to raise billions to purchase high-end AI chips.

Australia's data center operator, Firmus, owned by Nvidia, postponed its $5 billion initial public offering due to market volatility and conditions, opting for a private fundraising round instead. Rising energy costs, anticipated central bank interest rate hikes, and concerns over mounting government debts have fueled a continent-wide bond sell-off, raising borrowing costs to multi-decade highs.

With long-term yields back at multi-decade highs, investors no longer have the advantage of valuing AI growth in a low-cost-of-capital environment, said Charu Chanana, chief investment strategist at Saxo. Higher sovereign yields and the increasing corporate issuance to fund AI infrastructure mean capital is becoming both more expensive and more selective, placing balance sheets and future earnings quality at the forefront.

France has been particularly affected as investors scrutinize its debt levels, budget deficit, and political landscape ahead of the 2027 presidential election. French bond spreads remain elevated, with ING analysts warning of continued spread elevation and heightened volatility for the next half-year following the presidential elections in April and May.

US Treasury markets have remained relatively calm, with the 10-year yield stable at 5.226%, mirroring the 24-year high hit on Wednesday. Although this suggests a pause in the bond market sell-off for now, it does not guarantee that the sell-off will cease altogether. In currencies, the dollar remained strong as the euro continued its five-week decline, last trading at $1.122, hovering near its 17-month low reached earlier this week due to French debt concerns.