GLOBAL MARKETS-Asian stocks sell off as AI trades crumble after hot US inflation data

By Gregor Stuart Hunter

SINGAPORE, Oct 15 (Reuters) - Stocks sold off in Asia on Thursday with the tech supply chain bearing the brunt of the damage, as a quicker-than-expected increase in US consumer price inflation upped expectations for the Federal Reserve to act later this year.

MSCI's broadest index of Asia-Pacific shares outside Japan .MISX00000PUS tumbled 3.3%, led by a plunge of 8% in South Korea's KOSPI .KS11, while the Nikkei 225 .N225 fell 4.8%. S&P 500 e-mini futures were down 0.5%.

"The selloff in Asia looks less like a sudden deterioration in technology fundamentals and more like a repricing of the cost of capital," said Charu Chanana, chief investment strategist at Saxo Bank in Singapore. "Investors are not questioning whether AI demand exists," she said. "They are increasingly questioning what price they should pay for that growth when interest rates are high, volatile and potentially moving higher again."

Overnight, stocks on Wall Street logged their third day of declines after US consumer price inflation accelerated by more than expected in September.

The S&P 500 .SPX fell 1.1%, the Nasdaq Composite .IXIC tumbled 1.9% and a gauge of semiconductor stocks .SOX extended losses into a sixth day, as the prospect of higher interest rates pummelled shares of Oracle, CoreWeave and other AI stocks sensitive to higher borrowing costs.

"While the initial selloff was triggered by the hotter-than-expected CPI, tech was the main driver of today’s selloff," JPMorgan analysts wrote in a note. "AI was again the main challenge ... with financing risks and IPO timelines still at the centre of the story."

Asian stocks in the tech hardware supply chain were hard hit on Thursday. Taiwan Semiconductor Manufacturing Company 2330.TW fell 2%, Samsung Electronics 005930.KS plunged 9.3%, memory chipmakers SK Hynix 000660.KS and Kioxia Holdings 285A.T plummeted more than 11% each, and AI investor Softbank Group 9984.T lost 9.4%.

Some strategists found reasons for optimism, noting that volumes were relatively light and October is typically a volatile time of year for markets.

"I’m not worried, because stocks are not expensive, there is no sign of a recession, and demand still massively exceeds supply in most parts of the AI story," said Mark Matthews, head of research for Asia at Bank Julius Baer in Singapore.

The backdrop of investor anxiety drove safe-haven buying of government bonds, with the yield on the US 10-year Treasury bond down 7.8 basis points at 5.110%.

"We continue to think that yields at current levels offer decent value," DBS analysts wrote in a note. "We are not convinced that the Fed will have to deliver back-to-back hikes on the back of one set of CPI numbers."

The inflation data reshaped expectations for the Fed's rate path, with traders briefly pricing in roughly even odds of a hike later this month before scaling back those bets.

Fed funds futures are now pricing an implied 75% probability the US central bank will remain on hold at its next two-day meeting on October 28, little changed from a day earlier, according to the CME Group's FedWatch tool.

"The upside surprise in US CPI and the subsequent rally in bonds is highly counterintuitive," said Prashant Newnaha, senior rates strategist at TD Securities. "The cleanest read through is that the slump in AI is repricing growth expectations down, leading to bonds serving as a hedge for stocks."

Against the yen , the US dollar was down 0.4% at 157.74 yen, while the euro was up 0.6% at $1.1225.

The Australian dollar declined 0.2% to $0.6956 after employment unexpectedly decreased by 39,300 jobs in September, against expectations of an increase of 20,000.

Investor attention turns to speeches from Fed officials speaking in Bangkok, including Chair Kevin Warsh, for clues on the US central bank's next move, as well as US producer prices and retail sales data due for release later on Thursday. AI chip giant TSMC 2330.TW will also release earnings for the third quarter later in the Asian trading session.

In oil markets, Brent crude was down 1.7% at $104.20 a barrel as traders weighed up the effects of US sanctions relief on supply against attacks on shipping through the Strait of Hormuz.