By Ankur Banerjee
SINGAPORE, July 29 (Reuters) - Asian stocks rebounded on Wednesday after a brutal selloff a day earlier as anxiety about valuations, rising competition and AI spending rocked markets ahead of crucial earnings from big tech firms and a Federal Reserve policy decision.
Oil prices jumped in early trading after fresh attacks in the Middle East shattered the relative calm of recent days in the U.S.-Iran war as investors fret about the impact of depleting supplies on prices and global rates.
Asian chipmakers have been at the epicentre of this year's AI-driven rally and, more recently, investor concerns about its staying power, sparking sharp market swings. But strong earnings from SK Hynix helped calm some of those fears.
South Korea's KOSPI gained over 1% in early trading after sinking more than 10% to a three-month low on Tuesday. Shares of SK Hynix rose 2% after the chipmaker posted a more than sixfold increase in quarterly operating profit but missed lofty expectations.
"The broader backdrop remains one of rotation rather than outright risk aversion," said Chris Weston, head of research at Pepperstone.
MSCI's broadest index of Asia-Pacific shares outside Japan was 0.8% higher after shedding 3.6% on Tuesday and remains on course for a monthly drop of 6.6%. Japan's Nikkei gained 1% but is bracing for a 10% drop in July.
Earnings from "Magnificent Seven" members Microsoft and Meta later in the day will be a key test of the AI trade, particularly after Alphabet and Tesla spooked investors last week with negative cash flow reports.
Nick Twidale, chief market strategist at ATFX Global in Sydney, expects another tough day for equities in the Asian day with SK Hynix earnings exacerbating the uncertainty, while the news from the Middle East is also expected to weigh.
"I think the risk of a Fed hike will also concern investors, so rather than a more usual pre-Fed quieter market, I’ve got a feeling it could be a volatile day ahead."
Nasdaq futures were choppy in Asian hours and were last up 0.5% while European futures pointed to a higher open.
OIL JUMPS AHEAD OF FED MEETING
Brent futures jumped 3% to $86.80 per barrel while U.S. West Texas Intermediate (WTI) crude rose over 3% to $81.95 after U.S. Central Command said Iran had launched multiple ballistic missiles that were successfully intercepted.
"The latest attack highlights that the two sides remain a long way from resolving the core dispute of passage through the Strait of Hormuz that caused the earlier MOU to collapse," said Tony Sycamore, market analyst at IG.
Iran effectively shut the key waterway to ships other than its own after the U.S. and Israel launched strikes on February 28. A deal last month between Washington and Tehran partially reopened it, but the agreement collapsed in early July after Iran fired on ships using a channel it does not approve.
That has again put inflation pressures in the spotlight ahead of the Federal Reserve's policy decision due later on Wednesday. The U.S. central bank is seen as more likely to leave interest rates steady even as a growing number of its policymakers fret openly about inflation.
The decision remains unusually hard to call under the no-guidance regime adopted by the new Fed Chair Kevin Warsh, with traders pricing in a 33% chance of a hike. The U.S. dollar was perched near a one-month high ahead of the decision. [FRX/]
"We think the market may once again be underestimating the extent of the hawkish shift at the Fed, and that the (for now) moderate increase in energy prices may tip an already finely balanced meeting in favour of a hike this week," said Frank Flight, head of macro strategy at Citadel Securities.
"We acknowledge that it is a close call, but we now see a rate hike at the July meeting," Flight said.
(Reporting by Ankur Banerjee in SingaporeEditing by Shri Navaratnam)
