By Ankur Banerjee
SINGAPORE, Oct 13 (Reuters) - Asian stocks fell sharply on Tuesday as investors fretted about the durability of the rally in AI shares and increased competition while a widening conflict in the Middle East soured risk sentiment ahead of the tone-setting US earnings season.
Investors have ridden the AI wave in the past four years as the massive spending powered corporate profits and economic growth, although worries over concentration risks and whether a payoff from the expenditure
will come soon enough have weighed.
On Tuesday, MSCI's broadest index of Asia-Pacific shares outside Japan fell 2.4% to a two-month low. Tech-heavy South Korea's KOSPI sank 6%, triggering a 5-minute halt in program trading. Japan's Nikkei slid 2.6%, while Taiwan stocks fell 2%.
Nasdaq futures fell 0.77% while European futures were 0.39% lower, indicating a sombre mood in the market.
"A lot of it has to do with the chip selloff we saw on Wall Street overnight. That's bleeding into the Asian region," said Kyle Rodda, a senior analyst at Capital.com.
Overnight, shares of US chipmakers sank as reports of rapid tech progress by Chinese rival ChangXin Memory Technologies (CXMT) raised the prospect of Chinese firms closing the technology gap.
Rodda said the issue was less about the broader AI trade than about a possible narrowing of the US-China gap, and the pressure on margins and profitability that could follow if competition in the sector intensifies.
"Really, this isn't an issue about the size of the pie but how it's carved up," he said.
GEOPOLITICS DRIVING OIL MARKETS
Energy prices are back on the agenda as investors weigh the geopolitical developments in the Middle East and Russia-Ukraine, with Brent crude futures at $105.9 per barrel, near a two-week high.[O/R]
"Markets are rediscovering that geopolitics matters most when it feeds back into inflation," said Charu Chanana, chief investment strategist at Saxo in Singapore.
"The renewed jump in oil is keeping pressure on yields and taking some shine off expensive growth stocks, especially as the Russia-Ukraine energy truce looks fragile and Middle East supply risks remain live."
The cautious sentiment helped keep the US dollar near an 18-month high. The euro last bought $1.1157, while the Japanese yen was at 158.50 per US dollar. [FRX/]
EARNINGS TEST AWAITS
Investors' attention will be on the slew of US bank earnings this week to get a gauge on the impact of the recent surge in Treasury yields on dealmaking, lending growth and funding costs across the industry.
Four of the six largest US lenders, JPMorgan Chase, Goldman Sachs, Citigroup and Wells Fargo will report results later in the day.
Anthony Saglimbene, chief market strategist at Ameriprise Financial, said investors will be looking to bank results for insights on whether households are still paying their bills, borrowing, and spending at healthy levels.
"The Q3 earnings season starts with stocks near record highs and little room for disappointment," he said.
A toxic mix of inflationary pressure from elevated energy prices and worries about ballooning government debt has triggered several bouts of bond selloffs in recent weeks, pushing borrowing costs to multi-decade highs across the globe.
The benchmark 10-year yield was down 4.8 basis points at 5.195% in Asian hours, inching away from the 24-year high of 5.364% it hit last week.
The spotlight later this week will be on the US inflation data on Wednesday as traders parse economic data for indications on the Federal Reserve's policy path.
Traders are pricing in an 80.6% chance of the US central bank standing pat later this month, up from 51% a month earlier, CME FedWatch tool showed.
(Reporting by Ankur Banerjee in Singapore; Editing by Saad Sayeed)
