[10/16] Today's Financial Markets in 3 Minutes | Nikkei Average drops over 3,300 yen, US interest rates fall sharply. Concerns over AI investment shake the market

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In the financial markets on the 15th, concerns over the profitability and financing of AI-related companies intensified, accelerating selling primarily in Asian stock markets. The Nikkei Stock Average fell for the sixth consecutive day, closing at 64,425 yen, down 3,318 yen (▲4.90%) from the previous day. The South Korean KOSPI also plunged by ▲7.57%, with semiconductor-related stocks continuing to face severe adjustments. On the other hand, in the US market, selling eased following comments from NVIDIA CEO Huang defending AI infrastructure companies, leading to a rebound in the S&P 500 (+0.33%) and the Dow Jones Industrial Average (+1.08%).

The movement in the bond market is worth noting. Despite the US September PPI rising 1.3% month-on-month, significantly exceeding the market expectation of +0.6%, the 10-year US Treasury yield ended at 5.06%, down 13bp from the previous day. Funds flowed into government bonds, a safe asset, due to caution regarding AI-related stocks, and risk-aversion movements prevailed over the upside surprise in inflation indicators. The dollar-yen also fell from the low 158 range to the mid-157 range at one point, marking a trend where stocks fall, bonds rise, and the dollar weakens simultaneously.

🌶️ Today’s HOT Points

① Selling of AI-related stocks accelerates. Nikkei Average drops 4.9%, South Korean stocks plunge 7.6%

On the 15th, the Nikkei Stock Average fell for the sixth consecutive day to 64,425 yen, down 3,318 yen (▲4.90%) from the previous day, marking the largest decline in about five months. The TOPIX also fell by ▲2.38%, but the Nikkei’s decline was particularly notable. Selling was led by semiconductor-related stocks, with Advantest falling about 15%, and selling also spread to AI infrastructure-related materials and electronic component stocks such as Furukawa Electric and Mitsui Mining & Smelting. The South Korean KOSPI plunged by ▲7.57%, with SK Hynix falling over 11% and Samsung Electronics dropping about 9.5%. Markets with high dependence on semiconductor-related stocks are experiencing larger adjustments this time.

The background is not necessarily a doubt about the expansion of AI demand itself, but rather concerns about whether profits commensurate with the massive capital investment can be secured. At CoreWeave, which operates an AI cloud business, caution regarding credit risk is intensifying in addition to the stock price decline, and market interest is shifting toward the financing costs and investment recovery periods of AI-related companies. Coupled with reports of technological progress by Chinese memory semiconductor manufacturer CXMT, the valuations of semiconductor stocks, which had previously priced in high growth expectations, are being reassessed.

However, the US market was not entirely one-sided in its selling. Following comments from NVIDIA CEO Huang expressing a positive view on CoreWeave’s financial situation, the decline in AI-related stocks eased. The S&P 500 rebounded to 7,744 points (+0.33%), and the Dow Jones Industrial Average rose to 52,177 dollars (+1.08%). Meanwhile, the semiconductor index SOX continued to fall by ▲0.88%, with the shift of funds to financial and defensive stocks supporting the index as a whole. Going forward, not only the scale of AI investment but also actual monetization and the soundness of financing will likely become important judgment criteria affecting stock prices.

② Interest rates fall sharply despite significant upside in US PPI. The market is wary of economic and credit risks rather than inflation

The US Producer Price Index (PPI) for September, released on the 15th, rose 1.3% month-on-month, significantly exceeding the market expectation of +0.6%, and recorded a high growth of +6.3% year-on-year. The core PPI, excluding food and energy, also rose 0.7% month-on-month, exceeding the expected 0.3%. Following the CPI released the previous day, the persistence of inflationary pressure from the corporate procurement stage to consumer prices was confirmed. Also, September retail sales released at the same time rose 0.8% month-on-month, exceeding the expected 0.3%, but the control group excluding automobiles and gasoline remained at +0.1%, suggesting that a cautious view on the momentum of personal consumption is necessary if the impact of rising energy prices is excluded.

Normally, an upside surprise in inflation indicators increases expectations for additional rate hikes by the Fed and is a factor that tends to lead to a rise in US Treasury yields. However, yesterday’s 10-year US Treasury yield ended at 5.06%, down 13bp from the previous day, and the 30-year bond yield also fell about 12bp to 5.41%. In addition to the demand for safe assets following the sharp drop in AI-related stocks, it is believed that buying back to unwind short positions in bonds accelerated the decline in interest rates. In Japan, the 10-year government bond yield also fell by about 10bp to 2.90%, leading to a global trend of bond buying.

What is important here is that the decline in interest rates does not necessarily mean a retreat in inflation concerns. While price indicators are actually rising, caution regarding stock price declines and credit risks is boosting bond demand. If the market begins to strongly perceive the risk of an economic slowdown, the Fed may be forced to make difficult decisions between curbing inflation and stabilizing financial markets. The probability of an additional rate hike at the October FOMC remains at less than 30%, and the focus of the speech by Fed Governor Warsh scheduled for today will be how he evaluates the persistence of inflation and the tightening effect of long-term interest rates.

③ Dollar-yen falls from the 158 range to the 157 range. US interest rate decline and BOJ’s normalization stance support the yen

The dollar-yen fell from around 158.33 yen the previous day to around 158.00 yen on the 15th, and the yen strengthened to 157.55 yen at one point during the day. There were scenes where the dollar was bought back following the upside surprise in US PPI, but the sharp decline in US long-term interest rates suppressed the upside of the dollar. The dollar index (DXY) also fell to 102.00, down ▲0.54% from the previous day, and the euro-dollar rose to around 1.1220, with the dollar trending weakly against major currencies.

On the Japanese side, there were also factors supporting the yen. BOJ Policy Board Member Koshida indicated that, given the upside risks to prices and the accommodative financial environment, the bank should not be overly cautious about raising policy interest rates. While expectations for skipping a rate hike at the October meeting are dominant, the path toward normalization of monetary policy itself is being maintained, and expectations for additional rate hikes from December onwards remain. Also, Finance Minister Katayama indicated a stance of watching the foreign exchange market with a sense of urgency, and the authorities’ caution against rapid yen depreciation is also being noted.

However, this yen appreciation is considered to be primarily due to the decline in US interest rates and global risk aversion, rather than a rapid increase in expectations for BOJ rate hikes. In fact, the euro-yen has risen to the 177 range, and the yen has not been bought uniformly against all currencies. For the future dollar-yen, in addition to changes in the Japan-US interest rate differential—whether Fed rate hike expectations retreat further or BOJ additional rate hike expectations are maintained—it will be important to see whether the adjustment in AI-related stocks spreads to the entire financial market.

👀 Today’s Focus | Fed Governor Warsh’s speech and the rebound strength of AI-related stocks

Today, attention is focused on the speech by Fed Governor Warsh. While US CPI and PPI have successively exceeded market expectations, long-term interest rates have fallen sharply due to the destabilization of the stock market, making the Fed’s policy judgment increasingly difficult. If the Governor emphasizes a stance of prioritizing inflation control, interest rates may rebound, but if he mentions the tightening of financial conditions and the impact on the economy, there is room for expectations for additional rate hikes to retreat further.

In the stock market, the focus is on whether the rebound in US stocks from the previous day will spread to the Asian market. However, with concerns remaining regarding the credit risk and investment return rates of AI-related companies, it is necessary to distinguish between short-term buying back and a full-scale market recovery. Also, in the oil market, supply anxiety surrounding the Strait of Hormuz continues, and WTI crude oil futures have risen to 96.50 dollars. It is also necessary to remain cautious about the risk that high energy prices will prolong inflationary pressure.

🌶️ Today’s 3-Minute Summary

• Equities: The Nikkei Average fell 3,318 yen (-4.90%) to 64,425 yen, and the South Korean KOSPI also plunged by -7.57%. While concerns over investment recovery and credit risk for AI-related companies are intensifying, the US S&P 500 rebounded by +0.33%.

• Interest Rates: Although the US September PPI rose 1.3% month-on-month, significantly exceeding expectations, demand for safe-haven assets prevailed, causing the US 10-year Treasury yield to fall 13bp to 5.06%. The market is seeing a tug-of-war between inflation and risk aversion.

• Currencies: The dollar-yen pair fell to as low as 157.55 yen. While the decline in US interest rates is weighing on the dollar, the Bank of Japan’s normalization path and the Japanese authorities’ vigilance against yen depreciation are supporting the yen.

The most important development in yesterday’s market was the change that interest rates no longer rise even when inflation indicators exceed expectations. Whether the correction in AI-related stocks will remain a simple adjustment of stock market overheating, or whether it will spread to the credit market and the real economy, remains to be seen. Market interest is beginning to shift from inflationary surprises to changes in the financial environment itself.

Financial markets, in 3 minutes for busy people.

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