Market Wrap: Oil down, tech stocks slump on AI jitters

Asian technology-focused stock markets experienced a sharp decline on Tuesday due to heightened concerns over the outlook for the AI investment boom, while European stocks saw a boost as oil prices fell. Market experts expressed growing apprehension that cracks are emerging in the AI sector, as highlighted by Dan Coatsworth, head of markets at AJ Bell.

The decline in tech stocks followed remarks from Hock Tan, the CEO of semiconductor giant Broadcom, who likened the AI buying frenzy to gambling, stating that many investors lack understanding of their investments and were setting overly optimistic expectations. The International Monetary Fund (IMF) also addressed the issue during its annual meeting in Bangkok, warning of an AI correction at the onset.

The rapid growth of AI, coupled with the demand for semiconductors and data centers, has contributed to global growth despite geopolitical tensions, such as the Middle East conflict. However, the IMF's Global Financial Stability Report suggested that AI's potential economic gains might not be as substantial as anticipated, and low-income countries remained vulnerable to supply shocks.

On the trading floors, South Korea's Kospi index suffered a 5.5% drop, mainly due to the declining performance of chip leaders SK hynix and Samsung. The decline also followed reports of China's CXMT making progress in developing new technology to enhance memory chip density, which competitors are also striving to achieve. China is striving to close the competitive gap with US companies in AI models, humanoid robotics, memory, and other aspects of the technology supply chain.

Chris Weston, head of research at brokerage Pepperstone, noted that China's ability to produce competitive products at lower costs challenges conventional assumptions regarding market share, pricing power, and margin durability. Japanese stocks also dipped, with Kioxia experiencing a more than 13% decline on the Nikkei 225, while oil prices continued to fall amid increased attacks by Yemen's Houthis on Saudi Arabia, heightening Middle East tensions and raising additional supply concerns.

Market players are anticipating earnings reports from major tech companies in the coming months, seeking insights into the outlook for the AI sector amid rising borrowing costs and recent market volatility.