Asia-Pacific hit by tech-led sell-off

US stock index futures were mixed in early trade on Monday. Investors considered Friday’s selloff across US equities, with semiconductor and other tech-related stocks badly hit. Investors also had to consider soaring oil prices. Both WTI and Brent were up over 4% this morning following a fresh outbreak of hostilities across the Middle East. These appear serious enough to threaten the breakdown of the US/Iran ceasefire, which has just about held since April.

On Friday, the NASDAQ tumbled 4.2%, its largest one-day drop since April last year. The small cap Russell 2000 fell 3.5%, while the Dow and the S&P 500 lost 1.4% and 2.6%, respectively. All the majors posted losses for last week, while the VIX, which is a measure of S&P 500 volatility, jumped 40%.

Source: TN Trader

Despite the tech selloff and the tit-for-tat missile attacks between Israel and Iran, there has been some opportunistic buying this morning focused on semiconductors and other tech-related stocks.

Traders appear to be relatively confident of a rebound after Friday’s slump, once again betting that ‘buying-the-dip' will be a profitable ‘strategy.’ And why not? After all, it has worked out on every pullback since October 2022. Well, one reason to exercise caution is that it’s far from clear that the selloff is over.

Another is that every strategy has an end date, even one as basic as dip-buying. And on top of this, traders need to be fairly clear why equities sold off in the first place so they can assess if that danger is now over. If they’re going to blame the pullback on disappointment over Broadcom’s forward guidance or a strong set of payroll numbers, then they may be missing a trick.

Technically, US equities have looked very overbought for a while now, and last week the NASDAQ hit its head on a significant Fibonacci level. Broadcom’s disappointing forward guidance may be a one-off, and there won’t be another update for three months. But there can be little doubt that the US labour market, along with its economy, is robust enough for rate hikes, which, when considering the latest inflation data, are needed to help dampen price rises.

This morning’s jump in the oil price, following further hostilities over the weekend, only exacerbates inflation concerns. Later this week sees the release of key inflation reports, CPI and PPI. Meanwhile, there are also concerns that the huge upcoming AI-related IPOs, which begin this Friday with SpaceX, are sucking oxygen out of a market which already has a very thin atmosphere.

European stock indices opened lower on Monday, tracking declines across Asian-Pacific markets. Investors reduced their risk exposure in response to Friday’s tech-led selloff on Wall Street and as Israel and Iran traded missiles with each other over the weekend. But all the European majors bounced off their lows as the session progressed.

Investors were encouraged as US stock index futures found some early support, rather than continuing their sharp selloff at the end of last week. FTSE 100 constituents, BP and Shell, both gained around 1%, helped along by the 4% jump in crude oil prices this morning.

Source: TN Trader

The US dollar flew higher on Friday following the release of much stronger-than-expected Non-Farm Payroll numbers. The news increased the probability of rate hikes from the US Federal Reserve this year, which helped to lift the US dollar.

According to the CME’s FedWatch Tool, the likelihood of at least one 25-basis point rate hike before year-end is around 75%. And there’s now a 38% probability that the first hike comes in September. The dollar has also been supported by escalating tensions in the Middle East. Israel reported intercepting a missile launched from Yemen following its own incursion into Lebanon, and then Iran and Israel traded missiles.

The cash Dollar Index tested resistance around 100.00. This is its next upside target, which it must break above, and then hold on to any pullback, to have an opportunity to rally further.

Meanwhile, the Japanese Yen continued to weaken, with USD/JPY apparently relatively comfortable above the key 160.00 level. Japanese Finance Minister Satsuki Takayama reiterated that authorities stand ready to act against excessive currency volatility, though the comments had little impact on the market.

At the end of April, Japan intervened to support the yen when the USD/JPY broke above 160.70. They managed to push the pair down to just above 155.00. Yet here we are, one month on, and the yen is almost back where it started, while Japanese taxpayers are $73 billion worse off.

Source: TN Trader

Earlier this morning, gold dropped to a ten-week low of $4,269. It then recovered a touch. But, at the time of writing, it remains below $4,300. The precious metal continues to struggle as the US dollar finds a strong bid. Gold doesn’t always correlate inversely with the greenback, but it is now.

Source: TN Trader

While inflation may be picking up around the world, and gold is often considered as a hedge against high inflation, it is the prospect of higher interest rates to counter price increases which continues to weigh on gold. Not only that, but it appears that the dollar is also a useful ‘flight to safety’, and we have seen it rally every time there’s a setback in US/Iranian ‘efforts’ to end the war.

Silver also took a battering on Friday. In fact, it suffered an even steeper selloff, which extended into this morning’s session. Silver came within a few cents of $66.00 today, to hit its lowest level in ten weeks. As with gold, rising US Treasury yields and increased expectations that the US Federal Reserve will raise rates this year have boosted the dollar and reduced demand for non-interest-bearing assets.

Source: TN Trader

Oil prices surged on Monday, with both WTI and Brent up over 4% in early trade. Investors reacted to news of fresh hostilities breaking out between Iran and Israel. According to news reports and accusations from both sides, Iran launched missiles at Israel after the latter made incursions into Lebanon.

Source: TN Trader

Israel then carried out strikes on military targets in western and central Iran. These events have raised concerns that the already fragile ceasefire could break down completely. Talks between Tehran and Washington remain stalled.

OPEC+ met over the weekend and once again agreed to increase its production targets. These are unlikely to have any effect on oil prices as the Strait of Hormuz remains closed and controlled by Iran.

But it is worth noting that this is the fourth successive increase by OPEC+ of its oil output targets. It raised them by 206,000 barrels per day in April and May, and by 188,000 in June and now July as well. If OPEC+ continues at this current rate, it will have made back all the 1.65-million-barrel production cut from 2023 by September this year.

On Friday evening, Bitcoin dropped below $60,000 to hit its lowest level since October 2024, just before Donald Trump won his second term as President. Friday’s slump through minor resistance was a continuation of a sell-off which began soon after Bitcoin hit a three-month high at the beginning of May.

It then went on to drop 28% over the next four weeks. It has managed to find some buying interest, which pushed it back above $63,000 this morning, but the situation remains far from clear. Cryptos have been out of favour for a while now. The lack of clarity around the Clarity Act regulation, and an overall lack of buzz around crypto as all things AI-related came under the investor spotlight, led to crypto outflows.

The question now is how investors position themselves following Friday’s steep selloff across semiconductor and other tech stocks. This is particularly important given this Friday’s SpaceX IPO.

Despite last week’s technology-driven selloff, volatility remains relatively contained even against a background of growing geopolitical risks. Investors now turn their attention to a busy week featuring US CPI inflation data, the European Central Bank rate decision, the Bank of Canada policy announcement and UK GDP figures.

But it is SpaceX’s IPO on Friday, which is expected to dominate market discussions throughout the week, while investors continue to monitor the fallout from the recent technology sector correction. The US dollar remains well bid, and the Japanese Yen continues to weaken beyond 160 against the greenback. Rising oil prices have once again placed the Iran conflict at the centre of investor attention.

Following the sharp declines seen across Asian technology shares and last week's heavy Nasdaq losses, investors will be watching closely to see whether markets can stabilise or if the recent correction has further to run.

* The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance.