Asian-Pacific indices slide

US stock index futures were sharply lower in early trade on Tuesday. Investors continued to rotate out of major technology names following losses on Monday. Yesterday, the tech-heavy NASDAQ dropped 1.3%, while the S&P 500 lost a more modest 0.4%. But the Dow gained 0.3% while the small cap Russell 2000 added 0.8% to finish at a fresh all-time closing high.

Source: TN Trader

The sell-off began soon after the US open as traders returned to work after the long holiday weekend. But it picked up momentum overnight and into this morning, led by some of the market-leading semiconductor stocks, which have hogged the limelight of late.

Micron Technology (which reports after Wednesday’s close) was down 10% this morning. It was closely followed by Super Micro Computer (-7%), Marvell Tech (-8.9%), Intel (-8.7%), Advanced Micro Devices (-6.4%) and the Taiwan Semiconductor Manufacturing Company (-5.5%).

Things weren’t helped by SpaceX, which was down another 3% this morning and is now just 11% above its IPO price of $135. Despite this, the US major indices managed to rally modestly off their overnight lows later in the European session. Time will tell if this is a let another ‘buy the dip’ opportunity, or a harbinger of worse things to come.

While the oil price continues to retreat on the expectation that the Strait of Hormuz will soon be fully open for business, there are several headwinds which have appeared. It became apparent that the US Federal Reserve has turned hawkish under its new Chair, Kevin Warsh. Maintaining price stability, that is, getting inflation back down to its 2% target, is the Fed’s overriding aim, with the labour market taking a back seat.

According to the CME’s FedWatch Tool, there’s an 85% probability of at least one 25-basis point rate hike before year-end, with no chance of a cut. This has lifted the US dollar and Treasury yields, which will help US importers but could hinder exports, the opposite of President Trump’s plan, which required low interest rates and a cheap dollar to boost exports.

Questions are once again being raised over AI infrastructure spending, particularly as some corporate giants plan to sell equity to help fund expansion. Alphabet, which dropped close to 5% yesterday, recently announced plans for an $80 billion stock sale to fund AI infrastructure expansion. There are also reports that Meta Platforms is considering a major public stock offering to fund AI spending.

Historically, mega-cap US tech companies funded expansion from operating cash flow and occasionally debt. Last week, NVIDIA said it would raise $25 billion through a bond offering, its first in five years. So, corporations are looking to raise a lot of money this year, not forgetting the expected IPOs from Anthropic and OpenAI after the summer. The money must come from somewhere.

European stock indices opened sharply lower. Investors followed moves across Asian Pacific markets and US stock index futures as tech stocks came under intense selling pressure overnight. South Korea’s Kospi dropped 10%, as regulators warned about the excessive use of leverage when trading the index and high-flying tech stocks.

There are also concerns that the US Federal Reserve may lead the way in tightening monetary policy throughout the rest of the year. This could make it significantly more expensive to finance borrowing, thereby impacting AI infrastructure spending.

But, as with US stock index futures, the European majors rallied off overnight lows as the session progressed. Oil prices were a touch lower again today, and this is helping to offset concerns that higher energy prices could become embedded in the inflation data.

Source: TN Trader

Political developments in the United Kingdom were also a focus. Sir Kier Starmer is standing down as Prime Minister. Investors appear relatively sanguine at the prospect of former Greater Manchester mayor Andy Burnham as Sir Kier’s replacement.

But the debate is now about whether Mr Burnham should be allowed to sit back and enjoy an unopposed coronation as the next UK Prime Minister, or if the Labour Party can find anyone suitable to challenge him for the role.

The US dollar was firmer against most other currencies this morning. This saw the cash Dollar Index trade at a 13-month high, coming within 10 cents of 101.00. The dollar has benefited from safe haven buying during the US/Iran war. But it continues to find support even as it appears that the war may be coming to an end.

In fact, investors continue to increase their dollar exposure as they price in the prospect of rate hikes from the Federal Reserve. Last week’s monetary policy meeting, the first with Kevin Warsh as Chair, was considerably more hawkish than forecast.

Yesterday, sterling rallied after Sir Kier Starmer stood down as UK Prime Minister and Labour Party leader. But it has retreated this morning, giving back most of yesterday’s gains. Meanwhile, the Japanese yen is the only major currency to make positive headway against the dollar this morning.

Yesterday, the USD/JPY hit a two-year high when it traded above 161.90. The last time it did this, back in the summer of 2024, the Japanese authorities intervened by selling dollars and buying yen in a move which saw the pair drop below 140.00 three months later.

But this year’s intervention at the end of April was less successful. The yen took around 6 weeks to fall back to pre-intervention levels at a cost to Japanese taxpayers of over $72.4 billion. Despite this, traders are wary that the authorities could go again. There were some very sharp moves yesterday afternoon, which may prove to be a precursor to a move from the Ministry of Finance.

Source: TN Trader

In the early hours of Monday morning, gold pushed up through some mild resistance around $4,200. But it was unable to hold above here, and, after numerous attempts to recapture this level, was pushed back down overnight. The precious metal dipped below $4,100 earlier this morning, although it has picked up a touch since.

Nevertheless, it has struggled to hang on to gains following rallies, while it doesn’t appear to take much selling to do it serious damage. The ongoing strength of the US dollar, due to the expectation of higher US interest rates, has been particularly damaging.

If it can hold above $4,100 this week, then it may be able to make further gains. But a failure here could lead to a retest of support around $4,000, a level last seen in November. 

Source: TN Trader

Overnight dollar strength has done nothing to help silver either. Silver experienced a significant pullback this morning, falling more than 4% as investors continue to shift out of precious metals. Its daily MACD isn’t encouraging from a bullish perspective either.

It is not particularly oversold when compared to February or April this year. That could suggest that momentum could accelerate to the downside from here, especially if the US dollar were to rally further, suggesting a retest of $61 as support.

Source: TN Trader

Meanwhile, negotiations between the US and Iran indicate progress. Although conflicting statements from both sides continue to create uncertainty. Discussions surrounding nuclear inspections, sanctions relief and the future status of the Strait of Hormuz remain unresolved.

Oil prices fell again this morning. Front-month (August) Brent fell to its lowest level since the 10th of March, just over a week after the US and Israel launched their attacks on Iran. There are undoubtedly different messages coming out from the US and Iran over the progress made in talks. Sometimes one wonders if they are attending the same meeting.

Source: TN Trader

Despite this, mediators from Qatar and Pakistan confirmed that both sides had agreed to a roadmap toward a final agreement within 60 days. Certainly, the oil markets suggest that investors feel that progress is being made and that a deal is on the table. Most importantly, there are clear signs that the Strait of Hormuz is reopening and shipping is passing through.

Unfortunately, Iran has declared that the Strait of Hormuz remains under its administration and would not return to pre-war arrangements. But offsetting this to some extent, the US Treasury has issued a 60-day licence permitting Iranian oil production, sales and exports.

So far this week, bitcoin’s trajectory has followed that of US stock indices, particularly the tech sector. All the US majors peaked yesterday afternoon, soon after the open, as traders returned from their holiday-extended weekend. They then came under steady selling pressure, and that has continued into this morning’s trade.

Bitcoin has done likewise. Having traded at $65,600, its highest level since last Wednesday, early yesterday afternoon, bitcoin also turned lower. That weakness has followed on through overnight and into this morning as investors seem keen to cut their risk exposure all around.

Bitcoin broke below $62,000 this morning before recovering a touch. As things stand, it looks vulnerable to further weakness should investors continue to reduce their equity holdings.

Risk sentiment has deteriorated notably as investors digest the Federal Reserve's hawkish pivot, rising bond yields and growing uncertainty surrounding the outlook for inflation. Technology shares remain under pressure, with recent weakness in major AI-related names raising questions about whether investors are simply taking profits or reassessing growth expectations.

This week's key catalysts include global PMI releases, corporate earnings from Carnival and FedEx, and Thursday's highly anticipated US PCE inflation report. The inflation data could prove pivotal after markets rapidly increased expectations for a Federal Reserve rate hike later this year.

For now, falling oil prices, declining metals and weakness across cryptocurrencies suggest investors are becoming more defensive. Market attention remains firmly focused on inflation, central bank policy and whether the recent technology-led correction develops into something more significant.

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