Asian stocks have stabilised after a sharp drop as investors await crucial technology earnings and the Federal Reserve's policy decision. South Korea's KOSPI, which had more than tripled over 12 months to June, sank over 11% to its lowest level since early April, after dropping more than 10% on Tuesday. Taiwan stocks fell 5% while Japan's Nikkei slid 2.6% as the rout deepened across the region. That left MSCI's broadest index of Asia-Pacific shares outside Japan down over 2.45% after shedding 3.6% on Tuesday. However, Hong Kong's Hang Seng index bucked the trend and was up 1.4%, providing some regional stability. Nasdaq futures fell 0.7% in Asian hours while European futures slid 0.6% as the selling appeared to spread to other regions, with U.S. futures declining in the overnight session as geopolitical tensions continue to weigh on markets.
Iran's reported launch of multiple ballistic missiles toward a US base in Jordan has added significant uncertainty to an already volatile market environment, with oil prices climbing sharply during Wednesday's Asian session as Brent crude advanced toward $87.77 per barrel and West Texas Intermediate rose above $82.59. According to latest reports, both benchmarks gained nearly 4% as renewed military developments involving the United States, Saudi Arabia and Iran reduced expectations for a near-term easing of tensions and reinforced fears over the security of regional energy infrastructure. US crude inventories declined by approximately 3.3 million barrels during the week ended July 24, pointing to firm demand and tighter supply conditions ahead of official government data. Adding to the bullish sentiment, industry data showed US crude inventories declined by approximately 3.3 million barrels during the week ended July 24, with expectations that OPEC+ could suspend further production increases for three months beginning in October after completing the scheduled return of previously curtailed output. Brent futures jumped over 3% to $87.19 per barrel while U.S. West Texas Intermediate (WTI) crude rose more than 3% to $82.08 after U.S. Central Command said Iran had launched multiple ballistic missiles that were successfully intercepted.
The Federal Reserve faces mounting pressure to raise interest rates as markets continue to reflect an unusually high degree of uncertainty, with traders pricing in a 33% probability of an immediate rate hike despite expectations for no change at this meeting. As reported by Investing.com India, the rising trend since the Iran conflict began five months ago shows clear market sentiment pricing in high odds for near-term rate hikes. The challenge for the Fed is that if the fighting is truly over and energy exports return to normal, headline inflation will continue cooling, reducing pressure to raise rates and potentially unnecessarily slowing moderate economic expansion. However, markets see a strong likelihood of tighter policy in September, reinforcing the view that US interest rates may stay elevated for longer, with expectations for additional tightening remaining elevated, with markets assigning a 76.6% chance of a rate increase at the September meeting. The U.S. dollar was perched near a one-month high ahead of the decision, while the decision remains unusually hard to call under the no-guidance regime adopted by the new Fed Chair Kevin Warsh. "We think the market may once again be underestimating the extent of the hawkish shift at the Fed, and that the (for now) moderate increase in energy prices may tip an already finely balanced meeting in favour of a hike this week," said Frank Flight, head of macro strategy at Citadel Securities. "We acknowledge that it is a close call, but we now see a rate hike at the July meeting," Flight added.
The market faces a crowded risk calendar with major technology earnings scheduled for this week. As reported by Investing.com India, Microsoft (NASDAQ:MSFT) and Meta (NASDAQ:META) report on Wednesday, followed by Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) on Thursday. The Federal Reserve sits in the middle of this earnings gauntlet, while the Bank of England, European inflation, and Chinese PMIs add further market hazards. US stocks closed mixed on Tuesday as solid corporate earnings helped offset continued weakness in the technology sector, with several major companies posting stronger-than-expected quarterly results, including Coca-Cola, Boeing, Sherwin-Williams and PayPal recording notable gains after reporting upbeat earnings. Apple also advanced, briefly becoming the first company to reach a market valuation above $5 trillion during the session. However, technology shares continued to struggle following renewed concerns over AI-related spending and growing competition from China's semiconductor industry, with chipmakers and memory-related companies leading the declines. On Wednesday, earnings from major hyperscalers, including Amazon.com Inc. (AMZN), Apple Inc. (AAPL), Meta Platforms Inc. (META) and Microsoft Corp. (MSFT) are expected, along with chipmaker Qualcomm Inc. (QCOM) and fintech firms SoFi Technologies Inc. (SOFI) and Robinhood Markets Inc. (HOOD).
The AI trade continues to face financing challenges as investors question the economics of the next wave of capacity expansion. As reported by Investing.com India, semiconductors are no longer trading solely on earnings growth promises, with investors asking who pays for the next wave of capacity, how much debt must be raised, and whether future cash flows justify today's capital commitments. Hyperscaler and neocloud credit risk has widened, with circular financing concerns becoming harder to dismiss. The selloff may be separating companies capable of financing the AI boom from those with the scale and balance sheets to monetize it effectively. Technology shares continued to struggle following renewed concerns over AI-related spending and growing competition from China's semiconductor industry, with chipmakers and memory-related companies leading the declines, weighing on the broader technology sector despite some stabilisation in credit, breadth, and rates. On Tuesday, the VanEck Semiconductor ETF (SMH) lost nearly 3.5% and the iShares Semiconductor ETF (SOXX) fell nearly 5% at close, reflecting continued pressure on the sector. Shares of SK Hynix fell 9% as investors digested earnings that showed the chipmaker increased quarterly operating profit more than sixfold but missed lofty expectations. "SK Hynix delivered strong results, but in today's AI market, strong is no longer enough," said Gary Tan, portfolio manager at Allspring Global Investments. "Investors were looking for additional catalysts, particularly around long-term agreements and shareholder returns, to support a memory sector that has become the epicentre of the AI trade," added Tan. "This round of earnings would need to prove that the huge capital expenditure has paid off else we may see the market drag further," said Sean Teo, sales trader at Saxo in Singapore. Teo also noted that investors are now getting wary of circular financing where a handful of companies are investing into each other in somewhat of a closed loop where organic demand becomes unclear.
Despite the challenging environment, some market indicators suggest potential opportunities may be emerging, though the Treasury market is losing patience with the Fed's wait-and-see approach. According to Investing.com India, index correlation remains near multidecade lows while single-stock volatility and dispersion remain elevated, which suppresses index movement but cannot be taken for granted. The Magnificent Seven's forward multiple has fallen toward the lower end of its seven-year range, with prices falling while estimates continue rising. However, the biggest risk is the central bank's credibility, which could take a hefty blow if it mismanages policy at this juncture, as Fed Chairman Kevin Warsh faces the challenge of rationalizing tomorrow's policy decision and managing expectations for the months ahead. Investors are now turning their attention to a pivotal day for financial markets, with the Federal Reserve's policy decision, Chair Kevin Warsh's press conference, and quarterly results from Microsoft and Meta all due later on Wednesday. U.S. futures declined in the overnight session late Tuesday as geopolitical tensions are on the rise again after the U.S. said Iran launched multiple missiles at American forces, with Nasdaq-100 futures falling 0.37%, Dow futures down 0.08%, and S&P 500 futures slumping 0.08% at 9:53 PM EDT. During regular trading, U.S. benchmark indexes closed mixed, with the Dow and S&P 500 gaining more than 1% and 0.21% respectively, while the Nasdaq closed 0.22% lower.
