Asian markets sell off as AI trades crumble after hot US CPI data

Asian markets experienced a sharp decline on Thursday following a more substantial-than-anticipated increase in US consumer price inflation, which heightened expectations for the Federal Reserve to embark on rate hikes later in the year. The MSCI’s Asia-Pacific index outside Japan witnessed a 1.2% decrease, KOSPI in South Korea plummeted by 5.6%, and the Nikkei 225 slipped by 1.3%.

S&P 500 e-mini futures also saw a 0.3% drop. As Asian markets prepare for another challenging session, Chris Weston, head of research at Pepperstone Group Ltd in Melbourne, remarked on the pervasive weakness in the technology sector. KOSPI and Nikkei futures indicate renewed struggles within the tech industry, with a particular focus on leveraged ETF flows and AI infrastructure credit risk.

On the previous day, US stocks had already recorded their third consecutive decline after the US consumer price inflation surged beyond expectations in September. The S&P 500 tumbled by 1.1%, the Nasdaq Composite plummeted by 1.9%, and a gauge of semiconductor stocks extended losses into its sixth day. The prevailing anticipation of higher interest rates significantly impacted shares of prominent AI companies, such as Oracle and CoreWeave, which are highly sensitive to elevated borrowing costs.

Although the initial market sell-off was triggered by the hotter-than-expected CPI figures, the tech sector emerged as the primary driver of today's decline. JPMorgan analysts highlighted that AI remained the central challenge, with financing risks and upcoming IPO timelines at the forefront of the issue. The CPI data bolstered expectations of rate hikes from the Federal Reserve over the course of the year, possibly as early as later this month.

Fed funds futures now project a 31.6% probability of a 25-basis-point rate hike at the Fed's upcoming meeting on October 28, compared to a 22.1% chance just a day earlier, according to the CME Group’s FedWatch tool. The US 10-year Treasury bond yield fell by 4.4 basis points to 5.144%. Meanwhile, the US dollar weakened against the Japanese yen by 0.2%, reaching 157.925 yen, while the euro gained 0.3% to $1.1194.

With investor focus shifting towards speeches from Federal Reserve officials in Bangkok, including Chair Kevin Warsh, for insights into the central bank's future actions, as well as upcoming releases of US producer prices and retail sales data, AI chip giant Taiwan Semiconductor Manufacturing Company (TSMC) is set to unveil its third-quarter earnings during the Asian trading session.