Tech Weakness in Asia Spills Over

MACRO FRAME

US activity remains resilient enough to prevent a disinflationary narrative, while fiscal stress has become increasingly evident in euro-area dynamics.

STOCK INDEX FUTURES

Equity index futures are mixed as renewed concerns about the AI trade weigh on technology, while the Dow advances ahead of major bank earnings. The weakness follows a sharp selloff in Asian semiconductor shares amid concerns about Chinese competition. South Korea’s Kospi fell 5.5% by the close after deeper intraday losses, with Samsung Electronics and SK Hynix among the hardest-hit stocks. The pressure has carried into US semiconductor shares, renewing questions about valuations and the durability of the AI-driven rally. Lower oil prices and falling Treasury yields are providing a partial offset, while European equities are firmer. The contrast between the Dow and Nasdaq suggests selective pressure on technology rather than uniform de-risking, although earnings results will help determine whether that distinction holds. The key test is earnings breadth. JPMorgan, Goldman Sachs, Citigroup and Wells Fargo headline today’s reporting slate, with investors looking for evidence that lending, trading activity and credit conditions can sustain growth outside technology. Aggregate third-quarter S&P 500 earnings growth is expected to exceed 30% in the supplied estimates, but the market’s resilience increasingly depends on how widely that strength is distributed. Bank results today and Wednesday’s CPI report will test whether earnings momentum and a likely October Fed pause can offset doubts about the AI trade.

Watch point: Despite tech volatility, the earnings backdrop suggests bullishness, despite the advent of a new hiking cycle.

CURRENCIES

US DOLLAR: The USD index fell 0.34% to 102.24 as oil prices eased. Prospects for additional Russian diesel supplies and hopes that geopolitical tensions remain contained before the US midterm elections are reducing some energy-driven support. Wednesday’s CPI report is the principal catalyst, but the threshold for changing October policy expectations appears high. Markets assign roughly an 80% probability to unchanged Fed rates this month, compared with 51% a month ago. A modest upside inflation surprise may reinforce expectations of a December hike without materially changing the October pause narrative or the dollar’s direction.

Watch point: While current fiscal, macro, and geopolitical factors favor the dollar, it is beginning to enter overbought territory and could be susceptible to a modest correction.

EURO: The euro rose 0.34% to $1.1178, recovering from Monday’s 17-month low of $1.11525, although its underlying challenges remain. European natural gas prices reached €86.30, their highest since December 2022, while French fiscal concerns continue to weigh on confidence. The combination leaves the ECB facing a difficult balance between energy-driven inflation and risks to growth. Any slowing of its tightening cycle could further weaken the euro’s relative rate support. Evidence of European economic resilience, including upgraded German growth forecasts, are a potential source of support for the euro at lower levels. A Reuters poll showed that 90%  of economists surveyed expect the ECB to raise rates once more in December, after previously expecting the bank to be done with its tightening cycle.

Watch point: French sovereign stress will continue to be a dominant factor in price direction, however, the $1.10 level acts as a strong resistance level.

BRITISH POUND: Sterling is 0.32% firmer against the dollar at $1.3248 and remains near a 16-month high against the euro, with EUR/GBP around 0.8448. Expectations of additional Bank of England hikes are supportive, although the roughly 100 bps of tightening the market has priced through July 2027 looks overdone excessive. The October 28 budget remains a potential source of downside risk, particularly if fiscal concerns become more prominent. Markets assign roughly a 90% probability to a November hike, contrasting sharply with Reuters-polled economists, who expect unchanged rates until later in 2027 and see the next move as a cut. Remarks from Sarah Breeden, Catherine Mann and other officials this week could help clarify that divergence.

JAPANESE YEN: The yen gained 0.31% to 158.15 yen per dollar. Japan’s September wholesale inflation undershot expectations at 6.8% y/y, which lead investors marginally reduce expectations of Bank of Japan tightening this year. Markets now price 18 bps of tightening be year-end. The currency remains under pressure from US rate differentials and a market that is unconvinced the central bank will raise rates in a timely manner. The greatest near-term upside risk for the currency remains market intervention.

Watch point: While markets are underwhelmed at the BOJ, a path for additional rate hikes looks to be  appears to be the primary scenario.

AUSTRALIAN DOLLAR: The Aussie rose 0.27% to $0.6978. Minutes from the Reserve Bank of Australia’s September meeting proved rather hawkish. The minutes showed unanimous backing for September’s increase to 4.60% and persistent concern that inflation could remain too high for too long. Markets price approximately a 28% chance of another hike in November and around 50% in December. Third-quarter inflation later this month will be important, while falling business confidence highlights the growing pressure from higher rates and energy costs. Thursday’s Australian employment report will test the new pricing expectations. Consensus expects 20,000 additional jobs and an unchanged 4.6% unemployment rate. Further evidence of increasing slack would weaken the case for another RBA hike following September’s increase to 4.60%.

Watch point: August’s hiring figures argue for a higher-for-longer stance, leading the focus to Q3’s inflation data.

TREASURY FUTURES

Yields fell across the curve in a flattening move as the bond market resumed trading following Monday’s holiday, supported by lower oil prices and defensive demand amid the technology selloff. The 10-year yield is near 5.19%, approximately 5 bps below Friday’s close, while the two-year is around 4.78%. The two-year/10-year spread has narrowed to roughly 41 bps from 44 bps, representing a modest bull flattening. Markets assign an 81% probability to unchanged Fed policy this month. Softer recent inflation and employment data have reduced expectations of an immediate follow-up to September’s hike, even as energy prices leave the subsequent policy path uncertain. Wednesday’s September CPI report is therefore pivotal. The latest Reuters estimate expects a 3.7% headline figure and 2.5% core figure. A stronger reading could bring the timing and frequency of subsequent hikes back into focus, while a softer result would support an October pause and potentially provide relief to global bond markets. Inflation and growth data will remain central to the near-term policy outlook. Thursday’s PPI, retail sales and jobless claims will add evidence on pipeline inflation, consumer resilience and labor-market conditions. Fed commentary and Wednesday’s Beige Book will also help establish whether policymakers view higher borrowing costs as sufficient restraint or believe additional tightening is required. Barkin and Collins speak later today, offering further guidance on that distinction. Beyond CPI, investors will watch whether bank earnings sustain confidence in economic resilience: strong results could temper defensive demand, while evidence of weaker credit conditions would reinforce concerns about the cumulative restraint from higher rates.

Watch point: Inflation risk, fiscal and corporate supply, capital competition and term premium will be key factors in determining whether the yield curve maintains its recent flattening or falls into a bear steeping move.

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