The recent tech stock rout has shifted trader concerns from inflation to economic growth, raising doubts about central bank rate hikes. The Nasdaq index experienced its steepest one-day drop since April 2025, wiping out trillions in market value. This selloff followed US Democrats' midterm election victory, amplifying fears of stricter AI regulations and higher costs for data center construction.
As equity markets broadened their decline, with Taiwan shares posting their worst week since 2001, tighter financial conditions and reduced consumer spending could slow economic growth. This limits central banks' ability to raise interest rates, even as energy prices surge due to the Iran war. Rate-sensitive US 2-year bond yields were on track to fall 10 basis points for a second straight week, while French and German 2-year yields declined 19 and 7 basis points respectively.
Market bets on December rate hikes have weakened. The probability of a European Central Bank (ECB) rate hike dropped to 60% from 75% last week, while the Federal Reserve's chance fell to 70% from over 80%. The Bank of Japan's odds of leaving rates unchanged next month rose to 58% from 42%. Analysts suggest that tightening US financial conditions may influence Fed policy more than the latest nonfarm payrolls report.
South Korea, heavily exposed to the AI downturn, faces potential economic risks. A sharp drop in memory prices and semiconductor exports could prompt the Bank of Korea to pause rate hikes after November. For other emerging markets, the implications are mixed, with potential currency weakness and inflation pressures complicating central bank responses. Analysts caution that it is still too early to determine whether the tech selloff is a correction or the start of a deeper economic slowdown.