The chip reckoning?

Asia hit on chip fears

Asia-Pac shares took a battering overnight, with South Korea’s KOSPI leading the regional slide, shedding more than 10% and fast closing in on its March low of 5,042. The rout triggered two separate trading halts and leaves the index down nearly 40% from its all-time high of 9,385 set in June. Chip concerns remain front and centre as markets focus on capex, the circular story in relation to financing, and the Chinese making breakthroughs in the AI space. 

Two forces are driving the sell-off in Asian indices. First, reports that China is mass-producing its own lithography machines, which have not reassured the likes of ASML. Second, there is unease over circular financing in AI, as Nvidia's US$750 billion web of deals looks less like organic demand and more like a closed loop.

Wall Street steadies and Oil slides on Iran pause

Stateside, yesterday was a mixed session, with modest losses on the Nasdaq, a marginal gain on the Dow, and the S&P 500 closing unchanged. Unsurprisingly, this morning shows Nasdaq 100 futures down about 1%.

In the commodities complex, oil benchmarks closed Monday’s session notably lower after a pause in US strikes on Iran. This was bolstered by comments from President Trump suggesting a possible fresh deal with Iran – a sense of déjà vu that's becoming familiar. Brent crude now trades just south of the 50-day SMA at around US$86.14, with the 200-day SMA at around US$80.22 calling for attention.

As one might expect, US Treasuries were also bid on the back of the news, as inflation anxieties eased slightly. The USD index ended Monday considerably off worst levels, rebounding from support around 101.44 to close broadly unchanged.

Aussie inflation and Fed decision on the watchlist

Event risk is relatively thin today, but tomorrow should be an interesting one. Asia-Pac trading will see Australian CPI inflation and an update from the Fed.

Aussie trimmed-mean data in focus

Australia's Q2 26 CPI print is due at 1:30 am GMT. I think we all expect headline numbers to soften, given the pullback in energy prices. It will be the RBA’s preferred inflation gauge that garners most of the attention – the trimmed mean. This is expected to come in at 3.7% YY, up from 3.5% in Q1 (est. range: 4-3.6%).

Money markets have priced in 21 bps of RBA tightening by year-end, with August’s meeting sitting at around a 20% chance. Knowing this – and remembering last week’s solid jobs report – a hotter core reading tomorrow could firm up rate-hike bets and send the AUD higher.

Fed decision: Hold largely priced in

In terms of the Fed decision, the consensus leans in favour of a hold, with about a one-in-three chance of a 25 bp hike. I doubt we will see a rate increase, with US inflation easing in June – both CPI and PPI – and the recent jobs report also came in softer than expected. Couple this with cooling tensions in the Gulf, and there is no reason to move yet.

Having said that, I read an interesting piece this morning from Citadel Securities, which noted that Fed Chairman Kevin Warsh could use a hike to cement his inflation-fighting credentials and move the Fed away from telegraphing every step in advance. Time will tell.

What I will be watching for is any clues regarding September’s meeting, as markets are fully pricing a Fed hike. However, with the rate statement likely to be thin, and Warsh’s reluctance to offer guidance, I am not sure how much we will get from this.