Market Turmoil Following US Curbs
July 18, 2024 – Tech stocks faced significant turbulence as chip stocks in Asia tumbled on Thursday. This followed reports that the United States is considering tighter curbs on exports of advanced semiconductor technology to China.
Impact on TSMC and Other Asian Giants
Among the hardest hit were shares of Taiwan Semiconductor Manufacturing Co (TSMC). TSMC saw its market value drop by approximately T$1.7 trillion ($52.13 billion) over two days. The situation worsened after remarks from U.S. Republican presidential nominee Donald Trump. He suggested that Taiwan should compensate America for its defense, which led to a 2.4% drop in TSMC shares.
TSMC projected a 34% surge in third-quarter revenue compared to the previous year. Despite posting a net profit that exceeded market expectations, the company could not escape the broader market downturn.
Other major technology firms in Asia also faced declines. South Korean memory chipmaker SK Hynix fell by 3.6%, and Japan’s Tokyo Electron experienced an 8.75% slump. Furthermore, the Global X Asia Semiconductor ETF, which includes significant holdings like SK Hynix, Tokyo Electron, TSMC, and Samsung Electronics, dropped by 1.74%. This reduced its year-to-date gains to 16.7%.
European Market Reactions
In Europe, the STOXX 600 index rose by 0.2%. However, the technology sub-index hit a six-week low, last trading 0.37% lower. The market’s caution stemmed from a Bloomberg News report. The Biden administration might invoke the foreign direct product rule. This rule allows the U.S. government to block sales of products made with American technology, potentially affecting companies like Tokyo Electron and ASML in the Netherlands.
ASML shares saw a minor recovery of 0.3% on Thursday, despite a significant decline in the previous session. The company released forecast-beating second-quarter earnings, highlighting a rise in AI-related bookings. Yet, investor concerns over U.S. curbs on its sales to China overshadowed these results.
Analyst Insights and Market Sentiment
Analysts attribute the market’s reaction to macroeconomic and geopolitical factors rather than company fundamentals. ASML’s substantial sales to China, which accounted for about 49% of its lithography system sales in the second quarter, make it vulnerable to proposed U.S. restrictions.
TSMC reported that 69% of its first-quarter revenue came from North American customers, while only 9% was from China. Similarly, SK Hynix’s filings indicated that 31% of its sales last year were from China.
The Biden administration has aggressively sought to limit China’s access to cutting-edge chip technology. This includes broad restrictions issued in October to curb exports of AI processors from firms like Nvidia. Consequently, this escalating trade tension has accelerated a shift from big tech stocks to smaller value stocks. Investors anticipate benefits from lower U.S. interest rates for smaller companies.
Future Outlook and Investor Concerns
The global AI boom has driven a remarkable rally in tech stocks this year. As a result, the Nasdaq is up 20% and the S&P 500 has surged 17%. However, recent U.S. policy actions have triggered a wave of de-risking among investors. Jon Withaar of Pictet Asset Management noted, “Positioning had become very extreme in the semiconductor/AI space, and the import curb comments catalyzed a de-risking event.”
As the geopolitical landscape continues to evolve, the tech sector remains under scrutiny. Potential policy shifts are likely to drive market volatility in the coming months.
