Asian shares fall as AI funding fears drive Treasury rally and reduce rate hike bets

Asian shares declined on Friday as concerns about AI funding requirements hit technology stocks and drove investors toward government bonds and safe-haven currencies. Markets removed almost a quarter-point Federal Reserve rate increase from expectations for next year over fears that an AI bubble collapse could disrupt data-centre investment and weaken the US economy. The implied probability of a December rate increase dropped to 85%, leaving the increase less than fully priced. However, Brent reached a five-month high of $114 a barrel on Friday despite the retreat in rate hike expectations. Houthi attacks in Saudi Arabia heightened worries about energy supply disruptions as concerns grew about a sharp escalation of the Middle East conflict.

MSCI's broad Asia-Pacific index excluding Japan declined 0.3% on Friday. The index lost 2.7% for the week, recording a fourth consecutive weekly decline. Japan's Nikkei dropped 1.3% on Friday. The Nikkei lost 5% for the week. South Korea's KOSPI declined 1.7%. The KOSPI was heading for a weekly loss of 4.3%. Memory chipmaker SK Hynix fell 2.5% on the day. Taiwan's stock market remained shut because of a typhoon.

Mainland China's blue-chip index declined 1.1% on Friday to the lowest level since July 2025. The index stood about 20% below the late-June peak. Hong Kong's Hang Seng gained 0.1%. The Hang Seng had fallen 3% on Thursday.

The Nasdaq lost more than 2% on Wall Street. Meta shares dropped nearly 8% after AI spending caused the Facebook parent to report the first cash outflow in more than a decade. Meta announced plans for a two-for-one split involving non-voting shares to raise capital for technology spending. Tesla shares declined 3.1% as the electric carmaker reduced planned capital spending for 2026.

Charlie McElligott, Nomura Securities International's managing director for cross-asset strategy in New York, said Treasuries were again providing a hedge as markets appeared to reassess US growth risks arising from the AI downturn. Pepperstone research head Chris Weston questioned whether selling would intensify or markets would reverse direction again. Weston said worsening prices can encourage further selling without a new catalyst when buyers remain unwilling to participate.

US Treasuries recorded the largest daily rally in more than three years as investors sought safety and yields fell across maturities overnight. The benchmark 10-year Treasury yield dropped more than 19 basis points, the largest decline since March 2023. The 10-year yield then stabilized at 4.9591% on Friday, below the closely watched 5% threshold. Continued selling of France's bonds also partly contributed to the Treasury move, with France's benchmark yield rising 6 basis points overnight to 5.0601%, the highest since 2002.

ING's Americas regional research head Padhraic Garvey said the US 10-year yield was likely to return above 5% given inflation, fiscal deficits and the AI boom. Garvey said approaching US midterm elections could create further difficulties, but some calm in risk markets would be needed first. The two-year Treasury yield fell nearly 19 basis points overnight. The two-year yield was subsequently unchanged at 4.6566%. Japan's 10-year government bond yield dropped 9 basis points to 2.790%. Australia's 10-year government bond yield fell 10 basis points to 5.164%.

The dollar declined 0.2% to 156.44 yen on Friday as the yen attracted safe-haven demand. The dollar had lost 0.9% against the yen overnight. The dollar also fell 0.1% to 0.8196 Swiss francs, a one-month low, as the Swiss franc attracted safe-haven demand. The dollar had declined 0.5% against the Swiss franc overnight. Gold attracted no safe-haven demand and traded unchanged at $4,021.99 an ounce on Friday after losing nearly 3% overnight.