Tech stocks struggle on AI spending worries, elevated yields

Asian stocks experienced a decline on October 9, with a potential second consecutive weekly drop expected as investors grew concerned about soaring energy prices, bond market volatility, and the substantial funds required for AI investment. Brent crude futures reached US$103.70 per barrel in Asian hours, increasing by over 4% the previous day due to worries about the Middle East conflict, which exacerbated inflation concerns and prompted higher global interest rates.

Donald Trump affirmed on October 8 that the US would not initiate an attack on Iran before the November midterm elections, though traders doubted any progress towards resolving the war. Nick Twidale, chief market strategist at ATFX Global, questioned if Trump would honor his promise if Iranian strikes escalated. "If there were any signs that the White House is reconsidering military action, we could see oil prices surge sharply higher," he cautioned.

In terms of stocks, MSCI’s extensive Asia-Pacific index, excluding Japan, dropped by 0.16%, indicating an over 1% decline for the week. Markets in South Korea and Taiwan were adjourned for a holiday, while Japan’s Nikkei fell by more than 1%.

Tech stocks dragged down major US indexes overnight after OpenAI disclosed that its annualized revenue was US$20 billion (S$25.6 billion) lower than the company had previously claimed. This revelation cast a shadow over the tech sector, leading investors to reassess their exposure and the price they were willing to pay for future growth.

Chris Weston, head of research at Pepperstone, commented, "The technology, AI infrastructure, and semiconductor sectors have been on a downward trajectory, with the OpenAI news acting as the catalyst for investors to temper their exposure. However, the current price action suggests that investors are becoming more discerning about where they wish to allocate their funds and the price they are willing to accept for future growth."

Furthermore, investors were also monitoring the impending fundraising round, as SpaceX, Broadcom, and Oracle were all anticipated to raise billions for high-end AI chips. Meanwhile, Australia's Firmus, a data center operator backed by Nvidia, postponed its US$5 billion initial public offering due to market turbulence and opted for a private fundraising round instead.

High energy costs, anticipated central bank interest rate hikes, and worries about mounting government debts have fueled a prolonged global bond sell-off, driving borrowing costs to multi-decade highs. Charu Chanana, chief investment strategist at Saxo, explained, "With long-term yields nearing multi-decade highs, investors no longer have the advantage of valuing AI growth in a low-cost-of-capital environment."

Chanana added that higher sovereign yields and increased corporate issuance to finance AI infrastructure mean capital is becoming increasingly expensive and selective, emphasizing the importance of evaluating balance sheets and future earnings quality. France has been particularly affected, as investors scrutinize its debt level, budget deficit, and political climate leading up to the 2027 presidential elections.

"With the two rounds of the presidential elections only in April and May next year, French bond spreads remain elevated, with volatility likely to persist for more than half a year," ING analysts stated in a note. US Treasury markets remained relatively stable, with the benchmark 10-year yield remaining steady at 5.226%, close to the 24-year high it reached on October 7.

Despite this, ING analysts noted that the bond market sell-off was not yet over, as the market appeared to have paused temporarily. In currencies, the dollar remained strong, with the euro facing its fifth consecutive week of decline, last trading at US$1.122, hovering near the 17-month low it hit earlier this week due to concerns over French debt.