Asian stocks slip on Friday after AI valuation fears spark Wall Street chip selloff

The MSCI Asia Pacific Index slides 0.3%, with declines in Japan and Australia

Asian stocks edged lower on Friday (July 17) after a selloff in chipmakers dragged down Wall Street, as investors questioned whether massive artificial intelligence investments can justify lofty valuations. Oil climbed amid escalating geopolitical tensions.

Market Movements

• MSCI Asia Pacific Index: Fell 0.3%, with declines in Japan and Australia. South Korea was closed for a public holiday.
• S&P 500 Futures: Fell 0.3% as at 9:07 am Tokyo time.
• Hang Seng Futures: Fell 0.3%.
• Japan's Topix: Fell 1.3%.
• Australia's S&P/ASX 200: Fell 0.3%.
• Nasdaq 100 Contracts: Dropped 0.5% after the underlying gauge lost 1.6% on Thursday.

Key Drivers

Chip Sector Weakness

A US gauge of chip giants slumped more than 4% on Thursday in a renewed bout of volatility, as investors questioned whether tech stocks have grown too richly valued amid massive capital expenditure plans.

Taiwan Semiconductor Manufacturing's American depositary receipts dropped 2%, as a solid outlook was overshadowed by a higher spending forecast.

Netflix Drags on Sentiment

Netflix shares fell over 8% in extended trading after forecasting a second straight quarter of slowing sales growth.

Geopolitical Tensions

Brent crude recouped some of the previous session's losses as hostilities across the Middle East continued to escalate and shipping traffic slumped in the Strait of Hormuz. The commodity traded just under US$85 a barrel.

Heightened geopolitical tension helped keep a lid on risk appetite and pushed oil prices higher this week, fuelling concerns about inflationary pressures that could prompt the Federal Reserve to raise interest rates before 2026 is over.

Analyst Commentary

Matt Maley, Chief Market Strategist at Miller Tabak:

"The action in the chip stocks going forward is still the most important issue for the stock market. They are definitely showing some meaningful cracks, so they're going to have to see a strong and sustainable rebound soon or it will raise some real warning flags."

Fed Officials' Views

• Jeff Schmid, Fed Bank of Kansas City President: Said inflation is his biggest worry given the risk of a further acceleration in the months ahead.
• Lorie Logan, Dallas Fed President: Called for higher rates, saying inflation does not appear to be heading sustainably back to the target.

US Economic Data

• Jobless claims: Fell last week.
• Retail sales: Rose modestly in June, dragged down by a drop in gas station receipts that masked strong gains at some merchants.

Ellen Zentner at Morgan Stanley Wealth Management:

"Despite challenges, consumers are still spending and the labour market shows no signs of cracking. This type of data won't move the Fed's needle either way, but it underscores the ongoing resilience of the US economy."

Bond and Currency Markets

• Government bonds edged lower in Australia and New Zealand.
• Treasuries were steady.
• Treasury yields edged higher on Thursday.
• The dollar notched modest gains.

Source: Bloomberg