Asian stock rout deepens on AI worries ahead of tech earnings

"With the FOMC meeting sandwiched between major U.S. tech earnings this week, and expectations for AI capex already elevated, investors appear to be taking some risk off the table ahead of a critical test for both AI spending expectations and market liquidity," said Gary Tan, portfolio manager at Allspring Global Investments. MSCI's broadest index of Asia-Pacific shares outside Japan .MISX00000PUS slipped 1% after shedding 3.6% on Tuesday and was set for a monthly drop of 8%. Japan's Nikkei .N225 fell 1% and is bracing for a more than 10% drop in July. Earnings from the "Magnificent Seven" members Microsoft MSFT.O and Meta META.O later in the day will be a key test of the AI trade, particularly after Alphabet GOOGL.O and Tesla TSLA.O spooked investors last week with negative cash flow reports. Nick Twidale, chief market strategist at ATFX Global in Sydney, expects another tough day for Asian equities, while the news from the Middle East is also expected to weigh. "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. Nasdaq futures NQc1 were choppy in Asian hours and were last up 0.5% while European futures STXEc1 pointed to a higher open. Hong Kong's Hang Seng index .HSI rose 1.5% while China's blue-chip index .CSI300 was flat. Brent futures LCOc1 jumped 3% to $86.80 per barrel while U.S. West Texas Intermediate (WTI) crude CLc1 rose more than 3% to $81.95 after U.S. Central Command said Iran had launched multiple ballistic missiles that were successfully intercepted. "The latest attack highlights that the two sides remain a long way from resolving the core dispute of passage through the Strait of Hormuz that caused the earlier MOU to collapse," said Tony Sycamore, market analyst at IG. Iran effectively shut the key waterway to ships other than its own after the U.S. and Israel launched strikes on February 28. A deal last month between Washington and Tehran partially reopened it, but the agreement collapsed in early July after Iran fired on ships using a channel it had not approved. That has again put inflation pressures in the spotlight ahead of the Federal Reserve's policy decision due later on Wednesday. The U.S. central bank is seen as more likely to leave interest rates steady even as a growing number of its policymakers fret openly about inflation. The decision remains unusually hard to call under the no-guidance regime adopted by the new Fed Chair Kevin Warsh, with traders pricing in a 33% chance of a hike. The U.S. dollar was perched near a one-month high ahead of the decision. FRX/ "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 said. Asian stocks slid on Wednesday extending a brutal selloff as anxiety about AI valuations, rising competition and spending rocked markets ahead of crucial earnings from big tech firms and a U.S. Federal Reserve policy decision. Asian chipmakers have been at the epicentre of this year's AI-driven rally and, more recently, investor concerns about its staying power, sparking sharp market swings. South Korea's KOSPI .KS11 fell 5%, reversing earlier gains after sinking more than 10% to a three-month low on Tuesday, despite strong earnings from SK Hynix 000660.KS. Shares of SK Hynix 000660.KS fell 9% as investors digested earnings that showed the chipmaker increased quarterly operating profit more than sixfold but missed lofty expectations.

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