Explained - Why chip stocks sold off on Monday, dragging Wall Street lower

US equities on Wall Street had a volatile start to an important week on Monday, July 27, contrary to the strong gains that the futures market projected. A sell-off in chipmakers offset the gains from the fall in crude oil prices.

Dow Jones ended over 400 points off the day's high but ended with gains of 260 points. The S&P 500 ended at the flat line although most constituents of the index ended with gains. The Nasdaq Composite fell 300 points while the Nasdaq 100 index fell 400 points from their respective intraday highs. Both the tech-heavy indices ended below the flat line.

The 10-year bond yield remained steady above the 4.6% mark, a slight cool-off from Friday's high of 4.7%.

Why Chip Stocks Sold Off On Monday?

Chip stocks extended their losses for the third straight day on Monday, dragged lower by a confluence of headlines. Shares of Nvidia and AMD fell 5% each, while those of Seagate were down 4% ahead of its results later in the day.

The US-listed shares of SK Hynix (ADRs) fell 7.5% overnight to close below their IPO price of $149. Micron and Western Digital shares also fell 2% and 4% respectively on Monday.

Nvidia shares fell over concerns of the circular nature of their deals. The company announced that it is working on AI-led deals worth another $750 billion, including a $500 billion announcement with the SK Group. It is also in discussions with OpenAI to provide a guarantee of as much as $250 billion to help the latter lease computing from a US data center project.

The fall in Nvidia meant that Apple ended Monday's trading session as the world's most valuable company.

ASML NV shares also fell 6% on Monday on reports that a Chinese state-backed firm is producing chipmaking machines that could threaten its sales.

All of this resulted in the Philadelphia Semiconductor index ending the session with losses of over 2%. Big Tech companies, Apple, Amazon, Microsoft and Meta report their results across Wednesday and Thursday.

The fall in chip stocks outweighed the sell-off in crude oil prices, even amidst continued reports about attacks on Saudi Aramco's key oil facilities, which has neither been confirmed nor denied by either the company or the kingdom.

Two Day Fed Meet Begins Today

The other major trigger that Wall Street is watching out for this week is the US Fed rate decision.

According to Citadel Securities, the US Fed may deliver a surprise rate hike this week, in-line with new Fed Chair Kevin Warsh's price stability pledge.

A rate hike this week would not only establish the credibility of the new Fed Chair, but also reiterate the Fed's independence, according to Citadel.

This comes even as US President Donald Trump once again reiterated that the US should have the lowest interest rates in the world.

Currently, the CME FedWatch tool is projecting a 36.3% probability of a 25 basis points rate hike by the FOMC on Wednesday night.

The long list of results for the week begin today, with Visa, Coca-Cola, Boeing and Seagate reporting numbers. Advanced retail & wholesale inventories, and the consumer confidence data will also be reported today.