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MARKETS

In a dramatic twist reminiscent of a roller coaster's unexpected steep drop, the Nasdaq had its worst day since 2022 as tech stocks took a nosedive. The selloff was so intense it felt like investors were playing an impromptu game of "Hot Potato" with their shares.

The Nasdaq Composite index plummeted 2.8%, marking its most severe daily loss since December 2022. The S&P 500 didn't escape unscathed either, losing 1.4%. Meanwhile, the Dow Jones Industrial Average bucked the trend, climbing 0.6% and closing above the 41,000 mark for the first time—a new record high—just two months after surpassing the 40,000 threshold.

Among the hardest-hit were the tech titans. Nvidia (NVDA) saw its shares sink by 6.6%, while rival chipmaker Advanced Micro Devices (AMD) experienced a harsher drop of 10.2%. This decline came on the heels of a Bloomberg report revealing that the Biden administration is considering additional sanctions on Chinese tech firms and tighter semiconductor trade restrictions between the U.S. and China. Some view this as a strategic political maneuver to pre-empt former President Donald Trump's potential campaign focus on China. Trump's freshly nominated running mate, J.D. Vance, has made no secret of his disdain for China, stating, “I don’t like China,” and “I don’t like that China has stolen a lot of American jobs.”

Adding to the tech sector's woes, a cool inflation report from last week and unexpectedly robust retail sales data on Tuesday have led to increased expectations for a rate cut in September. Investors are pivoting towards stocks that traditionally fare better when borrowing costs are lower, leaving tech stocks out in the cold.

The Russell 2000 index, which tracks small-cap stocks, was down in midday trading Wednesday but still managed to stay up 4.5% for the week—a small silver lining in an otherwise stormy market.

The so-called "Magnificent Seven" tech stocks, which have been riding high on the wave of the artificial intelligence boom this year, took significant hits. Microsoft (MSFT) shares dipped by 1.3%, Apple (AAPL) slid 2.5%, Amazon (AMZN) fell 2.6%, Alphabet (GOOGL) dropped 1.6%, Tesla (TSLA) slipped 3.1%, and Meta Platforms (META) tumbled 5.7%.

In conclusion, while the Dow danced to a record high, the tech-heavy Nasdaq was left reeling from a one-two punch of geopolitical tension and shifting economic expectations. As the market adjusts, investors will be keenly watching for the next moves in this high-stakes game of financial chess.

We might be witnessing the early stages of a market rotation away from tech giants, affectionately known as the "Magnificent Seven," and into small-cap and cyclical stocks. An old adage on trading desks rings true: "Flows of funds follow price." With a significant amount of capital still tied up in tech stocks, even a whiff of negative forward guidance could spark a massive reallocation.

The recent sharp decline in tech shares could eventually lead to what a well-known market bear, Société Générales’ Albert Edwards is dubbing a "Teutonic Tech Trashing," which has the potential to ripple through global markets and the dollar.

Investors are increasingly uneasy about the hefty spending by US technology megacaps on artificial intelligence. Indeed "hyperscalers"—including Amazon.com Inc., Meta Platforms Inc., Microsoft Corp., and Alphabet Inc.—have poured (according to Goldman Sachs) approximately $357 billion into capital expenditures and research and development over the past year.

This enormous expenditure sits heavily on balance sheets, demanding future revenues to justify these outlays. While these investments may not strain earnings immediately, the day will come when “hyperscalers” must demonstrate that their massive spending on AI translates into substantial revenue and earnings growth.

In the meantime, the market is keeping a close eye on these tech giants. Investors are wary that the honeymoon phase of AI-driven growth might give way to a more scrutinized evaluation of whether these companies can turn their ambitious projects into profitable ventures.

ASIA MARKETS

Asian markets are bracing for a bumpy ride on Thursday following the global selloff on Wednesday. The looming threat of stricter U.S. trade measures has sent shivers through investors, with the tech sector bearing the brunt of the anxiety. All eyes will be on the Hang Seng tech index and Taiwan’s semiconductor heavyweight, TSMC, which are likely to come under heavy fire.

YEN INTERVENTION?

On the currency front, the yen has been flexing its muscles, hitting a one-month high of 156.00 per dollar on Wednesday after what appears to be Japan’s third intervention in a week. The dollar has taken quite a tumble, dropping six 'big figures' from 162.00 yen. The mysterious gap at the London Open added an extra layer of intrigue, like a plot twist in a financial thriller.

Japan's top currency diplomat, Masato Kanda, declared on Wednesday that he would not hesitate to act if speculators cause "excessive" moves in the currency market. He added, with a touch of stern resolve, that there’s no limit to how often authorities could intervene, according to Kyodo News.

Although some analysts suggest the timing doesn't make sense, it does to me, given the JPY was trading on the front foot yesterday. It seems to be part of a new playbook—nothing better than catching the market off guard, not even thinking about intervention.

For those keen on tracking the yen's movements, daily money market indicators from the Bank of Japan can offer hints about the scale of any intervention. However, the official confirmation and the amounts spent are only revealed at the end of each month.

With so much happening worldwide and in the markets, the idea of taking a vacation seems almost laughable. As we head into the dog days of summer in August, when everyone on the street usually takes off, let's hope things settle down. But let's be honest, in this age of electronic trading and high-speed internet connectivity, you're never far from the game. So, while we might dream of morning golf and trail runs finished with ice-cold Magners, we’ll probably still be peeking at our screens, ready to jump back in at a moment's notice.

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