A rout in tech stocks led by chipmakers deepened Thursday as worries about the AI buildout, bubbly valuations, lower-than-expected earnings growth at leading US frontier labs, Chinese competition, inflation and rates sent investors running for the covers. The super-AI-exposed Kospi tumbled 7.5% to a 6-month low, triggering circuit breakers at one stage with bellwether chip names SK Hynix down –11% and Samsung Electronics –9.5% lower.  Tokyo fell nearly 5% with SoftBank down -9%.

This has clearly been building for days and days but Anthropic didn't help, adding to fears about the return on investment from the AI buildout after telling investors Q3 revenue had risen almost 50% to $16.8bn and that it was profitable for a second straight quarter. However, the pace was slower than earlier this year, when revenues doubled between Q1 and Q2, and below some investors’ expectations.  Anthropic’s numbers come less than a week after rival lab OpenAI told investors it had hit its $50bn annualised revenue target at the end of September, below the $68bn figure that had been widely reported last month. The missing $18bn did for chip stocks and AI favourites at the time and they’ve not really had a chance to find their footing since. 

In a sign of the broad deleveraging, even bumper earnings from TSMC – the world’s largest contract chipmaker – failed to staunch the bloodletting. The Taiwan company posted a sixth consecutive quarter of record earnings, up 68.7% from last year and revenues rising 41%. 

The selloff across semiconductor stocks has sent bond yields lower, which if it sticks could ultimately support risk sentiment and support valuations. This is two-fold; one a flight to relative safety with the risk-free rate generating 5%, and two, because a breakdown in the AI capex narrative and pullback in spend will shrink the supply of debt, the huge increase of which has been a powerful driver of bond yields moving out to multi-year highs. 

Hotter-than-expected inflation data from the US had spiked bond yields before they fell off significantly. The10yr was up about 12bps above 5.3% and 2yr +16bps to 4.93% on the CPI before getting crushed lower as weak risk sentiment across the board saw a strong bid in the Treasury market, sending yields back to unchanged on the day and then lower still early Thursday. The benchmark 2-year yield is near 4.73%, down ~6bps, while the 10yr yield erased all its post-CPI jump and then some more by Thursday, down ~9bps to 5.095% and suddenly at a three-week low. 

The CPI print creates a problem for the Fed since it's above where it would ideally like it to be if it is to go slowly. September CPI inflation crossed the Waller Line as the core month-over-month reading hit +0.33% (ie above the +0.2% where it's coming down quick enough on annual basis), for an annual +2.6%. Headline CPI rose +3.7% year-over-year against +3.6% expected as the MoM hit +0.6%. The 3-month annualised rate rose to 3.4% from 2% in August. Meanwhile, German wholesale prices rose 8.7% year on year in September, up from 6.8% and the fastest since February 2023. US producer price inflation data is up today. 

Good ol' Blighty: The UK economy expanded by +0.1% in August, ahead of expectations for a contraction but slower than the +0.4% growth in July. Growth estimates for June rose as well as the official data underscores the apparent resilience of Britain’s economy in the face of global headwinds wherever you look for them, defying the energy and inflation shocks that have rattled bond markets. And it’s being done with a contracting labour market, which suggests productivity is improving. Whilst I would caution that labour market weakness remains the single biggest concern for the Bank of England, the underlying strength in the economy makes it more likely the MPC votes to hike rates by 25bps next month. 

Sterling trades firmer this morning after the release. GBPUSD tested the 25 June lows at 1.3136 yesterday as the dollar caught a strong tailwind from the jump in Treasury yields post-CPI. But as the risk tone changed and Treasury yields turned course lower the weakness started to creep into USD, lifting sterling and the euro – which traded close to a 200-week moving average yesterday at 1.110 before rallying back above 1.12 this morning.