Asian stocks extended their sharp decline on Wednesday as investor concerns over stretched artificial intelligence (AI) valuations, rising competition and heavy technology spending intensified ahead of major US technology earnings and a crucial Federal Reserve interest rate decision.
The sell-off was led by semiconductor companies, which have been at the centre of this year’s AI-driven market rally but have recently faced growing concerns about whether the sector’s rapid growth can be sustained.
South Korea’s benchmark KOSPI index dropped 5 per cent, reversing earlier gains after plunging more than 10 per cent to a three-month low on Tuesday. The decline came despite strong quarterly results from chipmaker SK Hynix, whose shares fell 9 per cent after investors judged its earnings performance against high market expectations.
SK Hynix reported that its quarterly operating profit had increased more than sixfold, but the results fell short of investor forecasts, raising concerns about the outlook for the memory chip industry and AI-related demand.
Gary Tan, portfolio manager at Allspring Global Investments, said investors were reducing risk exposure ahead of key events that could determine the future direction of AI spending and market liquidity.
“With the FOMC meeting sandwiched between major US tech earnings this week, and expectations for AI capex already elevated, investors appear to be taking some risk off the table,” he said.
MSCI’s broadest index of Asia-Pacific shares outside Japan declined 1 per cent after losing 3.6 per cent on Tuesday. The index was on course for an 8 per cent monthly decline. Japan’s Nikkei index also fell 1 per cent and was heading towards a more than 10 per cent drop in July.
Investors are closely watching earnings reports from Microsoft and Meta, two members of the so-called “Magnificent Seven” technology companies, for signs of whether the AI investment boom remains sustainable. Concerns intensified after Alphabet and Tesla raised market worries last week following reports of weaker cash flow performance.
Nick Twidale, chief market strategist at ATFX Global in Sydney, warned that Asian equities could face further pressure, particularly due to renewed tensions in the Middle East.
“I think the risk of a Fed hike will also concern investors, so rather than a more usual pre-Fed quieter market, I’ve got a feeling it could be a volatile day ahead,” he said.
However, some markets showed resilience. Hong Kong’s Hang Seng Index gained 1.5 per cent, while China’s blue-chip index remained broadly unchanged. Nasdaq futures were volatile during Asian trading hours but later rose 0.5 per cent, while European futures pointed to a stronger opening.
Oil Prices Surge as Middle East Tensions Return
Oil prices surged after fresh military developments in the Middle East disrupted a period of relative calm in the ongoing US-Iran conflict, reviving fears over global energy supplies and inflation.
Brent crude futures climbed 3 per cent to $86.80 per barrel, while US West Texas Intermediate (WTI) crude rose more than 3 per cent to $81.95 per barrel after the US Central Command reported that Iran had launched multiple ballistic missiles that were intercepted.
Market analyst Tony Sycamore of IG said the latest escalation showed that both sides remained far from resolving disputes over access through the Strait of Hormuz, a vital route for global oil shipments.
The waterway had faced disruption after US and Israeli strikes on Iran on 28 February. Although a deal between Washington and Tehran partially reopened shipping routes last month, the arrangement collapsed in early July after Iran fired on vessels using an unapproved channel.
The renewed tensions have placed inflation risks back in focus ahead of the Federal Reserve’s policy announcement.
Fed Decision Creates Market Uncertainty
The Federal Reserve is widely expected to keep interest rates unchanged, although concerns over inflation have increased among some policymakers.
The meeting has become particularly difficult to predict following the central bank’s decision to operate without forward guidance under new Fed Chair Kevin Warsh. Traders are pricing in a 33 per cent chance of a rate increase, while the US dollar remained close to a one-month high.
Frank Flight, head of macro strategy at Citadel Securities, said markets may be underestimating the possibility of a more hawkish Federal Reserve stance.
“We think the market may once again be underestimating the extent of the hawkish shift at the Fed,” he said, adding that rising energy prices could influence the decision towards a rate hike.
Flight acknowledged that the outcome remained closely balanced but said his firm now expected a rate increase at the July meeting.
With technology earnings, monetary policy and geopolitical tensions all converging, investors are preparing for continued market volatility as they assess the strength of the AI investment cycle and the broader global economic outlook.
