Asian stocks decline as South Korea’s Kospi drops 2.7% amid AI stock rout

OIL extended gains and Asian stocks dropped after the standoff between the US and Iran intensified, raising concerns that disruptions to energy supplies could accelerate inflation.

Brent climbed 1.6 per cent to about US$84.65 a barrel. The commodity soared 9.6 per cent on Monday (Jul 14) – its biggest gain since May 2020.

This was after US President Donald Trump reinstated the US blockade of Iranian ships transiting the Strait of Hormuz and demanded a 20 per cent reimbursement on all other cargo shipped through the waterway.

MSCI’s gauge for Asia Pacific shares fell 0.6 per cent, with South Korea’s Kospi Index leading declines with a 2.7 per cent drop.

The chip sector remained in focus after SK Hynix’s American depositary shares fell 9.3 per cent as an artificial intelligence-fuelled stock rout in South Korea spilled over into the US market. US equity-index futures also retreated.

Among the main market moves, the S&P 500 futures fell 0.3 per cent as of 9.06 am Tokyo time. The Hang Seng futures fell 0.2 per cent, Japan’s Topix fell 0.4 per cent and Australia’s S&P/ASX 200 fell 0.3 per cent.

On Monday, Treasuries fell across the curve as traders increased bets on an interest rate hike and oil jumped.

Money markets priced in about 50 per cent odds of a Federal Reserve hike in July as Governor Christopher Waller said officials may need to raise rates to tame price pressures.

Gold and silver retreated, and a Bloomberg gauge of the US dollar climbed the most since Jun 23. 

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The latest wave of attacks between the US and Iran dashed hopes for a near-term normalisation of traffic through the Strait of Hormuz.

The escalation adds another layer of uncertainty ahead of a pivotal week for markets, with earnings season kicking off alongside US inflation data and Federal Reserve chair Kevin Warsh’s congressional testimony, both seen as key to the outlook for interest rates.

“The energy sector is once again in the limelight as the status of the Strait of Hormuz is driving price action in global markets,” said Ian Lyngen at BMO Capital Markets.

“There is a growing sense that the situation is likely to get worse before it de-escalates.”

The flare-up comes as investors are increasingly questioning whether the enormous sums being poured into AI will generate commensurate returns.

An AI-fuelled stock rout in South Korea on Monday spilled over into the US market, underscoring concerns that the boom has become over-extended.

The selloff on the Kospi index is the latest sign of how volatile the Korean market has become after the AI rally drove massive outperformance versus global peers. 

“Uncertainty around the Middle East continues, but we think the AI wave is what will drive markets over the next few weeks, especially as earnings season kicks off,” said Sonu Varghese at Carson Group.

Investors are now turning their focus to US inflation data after Waller said policymakers may need to raise rates in the near term if underlying inflation continues to signal broad price pressures.

In the data due Tuesday, the consumer price index is expected to slow to 3.8 per cent in the year through June, from 4.2 per cent in May, according to a Bloomberg survey of economists.

Warsh will also make his first appearance before Congress as Fed chair.

“If we get another hot reading on core inflation this week, then the Federal Open Market Committee will need to consider tightening monetary policy in the near term,” Waller said Monday, referring to the central bank’s rate-setting committee. BLOOMBERG