The sell-off intensified fears that an AI investment boom, particularly in data centres and supporting infrastructure, could prove unsustainable and potentially undermine economic growth in the United States. The resulting shift in market sentiment triggered the biggest daily rally in US Treasury bonds in more than three years, while expectations of further interest rate increases by the Federal Reserve weakened considerably.
Investors have sharply reduced their expectations for monetary policy tightening next year, removing almost an entire quarter-percentage-point rate increase from market pricing. The probability of a Federal Reserve rate hike in December also declined, with market pricing putting the likelihood at 85 per cent.
The retreat in equities came despite persistent inflationary concerns stemming from rising energy prices. Brent crude oil climbed to a five-month high of $114 per barrel on Friday, as attacks by Yemen's Houthi movement in Saudi Arabia heightened fears of further disruptions to energy supplies. The developments have intensified concerns that the ongoing Middle East conflict could escalate, adding fresh uncertainty to the global economic outlook.
Asian markets remain under pressure
Across the Asia-Pacific region, the MSCI's broadest index of shares outside Japan fell 0.3 per cent on Friday, bringing its weekly decline to 2.7 per cent. The index has now recorded losses for four consecutive weeks, reflecting sustained investor unease over the outlook for technology stocks and the broader global economy.
Japan's Nikkei index dropped 1.3 per cent during the session, leaving it down approximately five per cent for the week. South Korea's KOSPI also came under pressure, falling 1.7 per cent and heading towards a weekly loss of 4.3 per cent. Memory-chip manufacturer SK Hynix declined 2.5 per cent, highlighting the continued vulnerability of technology companies to changing sentiment around AI investment.
Taiwan's stock market was closed because of a typhoon.
In mainland China, an index tracking blue-chip shares fell 1.1 per cent, reaching its lowest level since July 2025. The index has lost about 20 per cent from its peak in late June, underscoring the extent of the recent market downturn. Hong Kong's Hang Seng index, however, edged up 0.1 per cent after plunging three per cent on Thursday.
Describing the deteriorating outlook for technology stocks, Charlie McElligott, managing director for cross-asset strategy at Nomura Securities International in New York, said: "AI is under the cosh."
He added that the sudden resurgence in demand for US government bonds suggested investors were reassessing the risks facing the American economy.
"US Treasury bonds are — gasp — working as your hedge again, as the market seems to be real-time repricing the probabilities of a US growth scare off the back of the AI reset," McElligott said in a note.
Wall Street technology stocks take a hit
The turbulence was also evident on Wall Street, where the Nasdaq Composite index slumped by more than two per cent as investors reacted to mounting concerns over the financing requirements of major technology companies.
Meta Platforms, the parent company of Facebook, was among the biggest losers, with its shares falling nearly eight per cent. The decline followed the company's report of its first cash outflow in more than a decade, driven by substantial expenditure related to artificial intelligence.
Meta also announced plans for a two-for-one split involving non-voting shares as it seeks to raise capital to finance further investment in AI technology. The developments have renewed questions about whether the expected returns from the AI boom will justify the enormous sums being committed to its expansion.
Tesla shares also declined, dropping 3.1 per cent after the electric vehicle manufacturer cut its capital spending plans for 2026.
The latest market movements have raised concerns that investors could become increasingly reluctant to buy into falling share prices, potentially deepening the sell-off.
Chris Weston, head of research at Pepperstone, said the direction of markets would depend on whether selling pressure intensified or investors returned to the familiar pattern of sharp reversals.
"The question is whether selling accelerates or markets stage another familiar reversal," Weston said.
He warned that deteriorating market conditions could themselves encourage further selling, even without an additional negative development.
"There's nothing more emotive than a falling market where buyers refuse to engage. Sellers don't need a fresh catalyst when deteriorating price action itself encourages more selling," he added.
US Treasury bonds attract investors
As equities weakened, investors moved towards the perceived safety of US government debt, triggering a sharp decline in Treasury yields across maturities.
The yield on the benchmark 10-year US Treasury note fell by more than 19 basis points overnight, marking its steepest daily decline since March 2023. It subsequently stabilised at 4.9591 per cent on Friday, moving back below the closely watched five per cent threshold.
The two-year Treasury yield also dropped by nearly 19 basis points overnight before trading broadly flat at 4.6566 per cent.
The bond rally reflected growing demand for assets considered safer during periods of market instability, alongside a reassessment of the Federal Reserve's likely policy direction as concerns about a potential slowdown in US economic growth intensified.
However, analysts cautioned that the decline in yields might not be sustained.
Padhraic Garvey, ING's regional head of research for the Americas, said the 10-year yield had moved below five per cent with considerable force but questioned whether the decline would continue.
"The US 10yr yield gapped back below 5% with some conviction. We're not convinced it keeps on going," Garvey said.
He indicated that inflationary pressures, government budget deficits and continued investment in AI could push yields higher again. The approaching US midterm elections could also introduce additional uncertainty into financial markets.
"We're minded to expect it to snap back above (5%), as we still have inflation/fiscal deficit/AI boom underpinnings to navigate. And we have the US midterm elections approaching as an excuse for trouble. But it will need some degree of calm in the risk space first," he added.
Government bond markets elsewhere in the Asia-Pacific region also recorded gains. The yield on Japan's 10-year government bonds fell nine basis points to 2.790 per cent, while Australia's 10-year yield declined 10 basis points to 5.164 per cent.
Yen and Swiss franc strengthen as oil prices rise
Currency markets reflected the broader flight to safety, with the Japanese yen and Swiss franc strengthening against the US dollar.
The dollar fell 0.2 per cent to 156.44 yen on Friday, following a 0.9 per cent decline overnight. Against the Swiss franc, the dollar slipped 0.1 per cent to 0.8196 francs, its lowest level in a month, after falling 0.5 per cent in the previous session.
Gold, which often attracts investors during periods of uncertainty, failed to benefit from the latest shift towards defensive assets. The precious metal traded flat at $4,021.99 an ounce on Friday after losing nearly three per cent overnight.
The contrasting movements across stocks, bonds, currencies and commodities highlight the uncertainty confronting investors as they weigh the sustainability of AI-related spending against inflation risks, geopolitical tensions and the outlook for US monetary policy.
With technology shares under pressure, oil prices elevated and government bonds attracting renewed demand, market participants are now assessing whether the latest sell-off represents a temporary correction or the beginning of a more prolonged reassessment of the global investment outlook.