Japanese stocks fell strongly, Tuesday, under pressure from a new wave of selling in semiconductor companies related to artificial intelligence, coinciding with escalating geopolitical concerns and continuing inflationary pressures.
On the other hand, the government bond market witnessed mixed movements, with short-term yields rising and their long-term counterparts declining, as investors awaited the Bank of Japan’s next move.
The Nikkei 225 index closed down by 1.82 percent at 67,777.52 points, recording its loss for the fourth session in a row, while the broader Topix index rose by 0.14 percent to 4,110.67 points.
The decline came after the Philadelphia Semiconductor Index in the United States fell by 1.2 percent during the previous session, sparking a wave of selling in shares of Japanese companies linked to electronic chip supply chains.
The pressures coincided with data showing the continued rise in wholesale prices in Japan, despite the slow pace of their increase, which strengthened expectations of the possibility of the central bank raising interest rates again before the end of the year.
Investors' doubts have increased about the ability of the huge investments made by global technology companies in artificial intelligence infrastructure to achieve returns commensurate with their cost.
Maki Sawada, equity strategist at Nomura Securities, said that the downward trend in American semiconductor stocks was directly reflected in the Japanese market.
She added that investors have become more cautious about the feasibility of massive capital spending by major cloud computing companies, in addition to concerns related to the impact of international tensions on energy prices.
Shares of Japanese chip companies suffered severe losses, as “Kioxia Holdings” stock fell by 13.28 percent, while “Kokusai Electric” stock fell by 9.53 percent, and “Sumco” stock fell by 8.64 percent.
These losses reflect the sensitivity of the Japanese market to changes in the expectations of the American technology sector. Given the important role that Japanese companies play in producing chip manufacturing equipment and the materials used in its manufacture.
Despite the decline in the main index, 156 of its component stocks rose, compared to a decline of 68 stocks, which indicates that losses were concentrated in a limited number of stocks with large weights.
The maritime transport sector topped the gains of the sectors included in “TOPIX”, rising by 3.35 percent, while the non-ferrous metals sector recorded the largest losses, with a decrease of 4.79 percent.
“Pan Pacific International” was the biggest gainer, up 4.01 percent, followed by “Sumitomo Heavy Industries” by 3.79 percent, then “Kawasaki Kisen Kaisha” by 3.53 percent.
Geopolitical developments contributed to increasing pressure on investors' appetite for risk, especially with continuing tensions in the Middle East and Ukraine.
Sawada noted that concerns about the attack on a Saudi airport, along with doubts about the possibility of the continuation of the ceasefire agreement between Russia and Ukraine, affected market sentiment.
Economic concerns focus on the possibility that these developments will reflect on oil and energy prices, which may increase production and import costs in Japan.
Japan is one of the economies most sensitive to fluctuations in global energy prices, given its heavy reliance on imports to meet its needs.
Continued high oil prices, coupled with a weak yen, will increase pressure on the prices of imported goods and limit the ability of companies and households to absorb the additional costs.
In the debt market, short-term Japanese government bond yields rose, while longer-term bond yields fell, a reflection of differing investor expectations about monetary policy and the outlook for inflation and growth.
The two-year bond yield, which is most sensitive to interest rate movements, rose by one basis point to 1.915 percent.
The five-year bond yield also rose by 1.5 basis points to 2.350 percent, while the ten-year benchmark yield settled at 3.01 percent.
On the other hand, the 30-year bond yield fell by one basis point to 4.045 percent, recording its decline for the fourth session in a row, while bond yields for 20 and 40 years stabilized.
Rising short-term yields reflect continued expectations of tightening monetary policy, while falling long-term yields may indicate buying after a previous rally, as well as caution towards growth prospects.
Keisuke Tsuruta, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities, said that the noticeable decline in long and longer-term yields late last week is, so far, no more than a correction of previous movements.
He added that the continuation of this trend is still uncertain, which calls for caution in evaluating the market's path.
Tuesday's data showed Japanese wholesale prices rose by 6.8 percent last September, on an annual basis, compared to an increase of 7.6 percent during August.
Although the reading was lower than expectations, it confirmed the continuation of price pressures at high levels.
Import prices jumped by 24.5 percent, affected by the weak yen, which raises concerns about the transmission of higher costs to companies and consumers.
These data come after the Bank of Japan's decision to raise interest rates in September, amid signals from its officials that further monetary tightening may be necessary to ensure stable inflation.
Market expectations are for an additional 25 basis points increase before the end of the year, although uncertainty about its timing remains.
In global markets, the impact of US bonds was limited due to the closure of Treasury bond trading on Monday, on the occasion of the Columbus Day holiday, while European bond yields fell slightly.
The recent moves indicate that Japanese markets are facing simultaneous pressures from declining technology stocks, rising import costs, and the possibility of continued tightening of monetary policy.
The direction of stocks and bonds during the coming period will remain linked to the performance of the American semiconductor sector, developments in energy prices, and the Bank of Japan’s willingness to continue raising interest rates.
In light of these factors, volatility is expected to continue, as investors attempt to balance the growth opportunities provided by artificial intelligence with the risks associated with inflation and high financing costs.
At a time when the war is redrawing the map of energy flows in the region, the International Monetary Fund is betting on a strong recovery of the Saudi economy in 2027, with an expected growth of 7.9 percent, driven by the restoration of production and exports to their momentum as shipping disturbances subside. This estimate, compared to Gulf economies more exposed to disruption of traffic through the Strait of Hormuz, is based on the diversity of Saudi oil export routes, which mitigates the impact of the shock. This comes as the Fund revised its expectations for the Saudi economy in 2026, with the estimated contraction decreasing compared to its previous expectations, making the recovery path linked to the duration of the turmoil and the speed of the return of energy and trade flows to normal.
The Fund's expectations reflect the magnitude of the shock facing the region's economies, as well as the expected recovery as it subsides. In the World Economic Outlook report, entitled “Resilience Under Pressure: Urgent Options,” the Fund expects the economies of the Middle East and Central Asia to contract by 0.3 percent in 2026, followed by growth of 6.3 percent in 2027. Compared to its estimates in April, the Fund reduced its forecasts for 2026 by 2.2 percentage points, while raising its forecasts for 2027 by 1.7 points. This amendment reflects the assumption that the closure of the Strait of Hormuz will continue for a longer period than previously expected, which will increase pressure on the region’s economies in the current year, but it makes the expected recovery greater when it is reopened and production, exports, and transportation movement are restored.
In this scenario, the Fund expects the GDP of Kuwait to contract by 16.7 percent in 2026, Iraq by 16 percent, Qatar by 15.6 percent, and Bahrain by 11.3 percent. In 2027, the four economies are likely to rebound strongly, with Iraq recording growth of 19 percent, Qatar 18.8 percent, Kuwait 17.1 percent, and Bahrain 13.9 percent, with production, exports, and logistics services returning to their usual activity.
On the other hand, the Fund expects the impact of the unrest on Saudi Arabia to be relatively less severe, as it reduced its estimate of the economic contraction in 2026 to 3.3 percent, compared to 5 percent in July forecasts, and 6.4 percent in April forecasts. On the other hand, he raised his expectations for the growth of the Saudi economy in 2027 to 7.9 percent, from 2.4 percent in the July update, and 3.4 percent in April, while the Ministry of Finance expects stronger growth of 12.8 percent, according to the preliminary budget statement. The estimates reflect optimism about the path of recovery in the coming year, even if it varies in size, in light of hopes that production, exports, and trade activity will regain their momentum with the decline of navigation disturbances.
This path intersects with the expectations of the World Bank, which in its report on the economic prospects for the Middle East, North Africa, Afghanistan and Pakistan region, issued in October, suggested a strong rebound in regional growth in 2027, with the region’s economies, excluding Iran, expected to grow by 7.8 percent, if the conflict subsides by the end of 2026. The bank attributed this recovery mainly to the restoration of fuel production and exports with the reopening of trade routes and the gradual normalization of energy flows. In Saudi Arabia, he pointed out that the “East-West” pipeline allowed export routes to be diverted to the port of Yanbu on the Red Sea, which helped the Kingdom reduce the impact of disruption to navigation through the Strait of Hormuz.
The expected contraction of the Saudi economy for this year in the Fund’s estimates is less than the estimates of the Ministry of Finance, which expected a contraction of the real gross domestic product by 3.6 percent in 2026. The recovery expectations are consistent with what the Fund confirmed in Article IV consultations with Saudi Arabia in July regarding the flexibility of the economy in the face of disruptions to oil and trade flows, supported by the diversification of energy infrastructure, logistics services, and the ability to redirect shipments.
In this context, the Kingdom benefits from multiple oil export routes, and is working to enhance its ability to deliver supplies to global markets via the Red Sea. The Minister of Energy and Minister of Industry and Mineral Resources, Prince Abdulaziz bin Salman, announced the goal of raising oil export capacity to about 10 million barrels per day within two to three years, through developing the “East-West” pipeline and strengthening the associated infrastructure. He pointed out the possibility of converting a line designated for transporting gas to transporting oil temporarily, adding about 1.2 million barrels per day within seven to eight weeks, before returning it to its original use to meet summer needs.
These steps enhance the Kingdom's ability to diversify export outlets, while the Fund's expectations for the year 2027 are based on the return of production, exports, and trade movement to normal with the decline of navigation disturbances.
In this context, Kpler data showed that Saudi Arabia’s crude oil exports rose to 6.67 million barrels per day in September, recording the highest level in seven months, and returned to pre-war levels. This reflects the Kingdom's restoration of momentum in oil flows, with the strengthening of exports through the Strait of Hormuz since September, in addition to benefiting from the diversity of export outlets.
In parallel with the expected recovery, Moody's, the credit rating agency, expected that controlling spending and re-prioritizing government investments would support financial recovery in 2027, and help the Kingdom maintain financial space to continue economic diversification projects. The agency noted that prolonged trade disruptions and additional spending limited the financial improvement it had previously expected, while disruptions to strategic maritime shipping routes may continue until mid-2027, which may affect oil production.
In terms of economic indicators, the Fund expects inflation in Saudi Arabia to reach 1.9 percent in 2026, and rise to 2.2 percent in 2027. The current account is also likely to record a deficit equivalent to 3.5 percent of the gross domestic product this year, before shrinking to 1.3 percent next year.
These expectations come at a time when the repercussions of the war and its effects on growth, trade, and energy flows top the agenda of the annual meetings of the International Monetary Fund and the World Bank Group, held in Bangkok from October 12 to 17. The Saudi Minister of Finance, Mohammed Al-Jadaan, heads the Kingdom’s delegation participating in the meetings. He also chairs the meeting of the Fund’s International Monetary and Financial Affairs Committee, which discusses global economic prospects, growth risks, economic policy priorities, and the Fund’s role in helping member states face current challenges. These discussions gain importance in light of the varying repercussions of the conflict on the region's economies, between the pressures of disruption of production and trade on the one hand, and the opportunities for recovery with the restoration of energy flows and exports on the other hand.
In conclusion, the Saudi recovery path in 2027 remains linked to the rapid restoration of energy and trade flows, while the diversification of export outlets and non-oil activities, in addition to the rearrangement of spending and investment priorities, provide factors that support the economy’s ability to overcome the repercussions of regional turmoil.
Banking regulators in America and Europe are intensifying their efforts to contain the growing risks associated with artificial intelligence, with some pointing to the possibility of cyber attacks on banks or rogue agents undermining global financial stability. According to Reuters, six people familiar with the matter reported.
The sources added that the regulatory oversight, new details of which are revealed here for the first time, reflects the growing realization that progress in the field of advanced artificial intelligence may require heavy investments in cyber attack recovery, greater attention to reliance on external technology providers, and in some jurisdictions more formal regulatory guidance.
Two of these people said, according to Reuters, that three major regulatory bodies in the United States, including the Federal Reserve (the US central bank), are asking banks about their use of advanced artificial intelligence models, which is in addition to previous oversight.
Three of them said questions include whether banks use technology developed in China, use artificial intelligence agents in cyber defense, and whether they are able to control increasingly autonomous systems.
Europe's regulators, including the Bank of England and the European Central Bank, are pressing banks to improve recovery plans, fearing that rapid advances in artificial intelligence could cause serious damage and disruption to financial markets sooner than previously feared, three people familiar with Europe's thinking said.
A senior executive at a major European bank explained that they were also concerned about the possibility of serious damage to the banking and financial markets within six months.
The debate over oversight of artificial intelligence has intensified amid warnings from the sector in the wake of recent incidents, with Reuters reporting that Jamie Dimon, CEO of J.P. Morgan, urged corporate leaders to join an industry group focused on the United States to address the risks of artificial intelligence.
The American cybersecurity company CrowdStrike said this month that a person in China likely used an artificial intelligence agent developed in China and the Anthropic company's Cloud Code tool in a cyberattack on South Korean banks.
Reuters reported that rogue artificial intelligence agents developed by OpenAI participated in a hack of the artificial intelligence platform “Hagging Face.”
Researchers at Anthropic have warned that increasingly powerful artificial intelligence systems may eventually escape human control and may even pose an existential threat, sparking calls for tighter regulation.
The International Monetary Fund warned on Tuesday of “complacency” in global financial markets, pointing to various risks, including the possibility of a cyber attack. The Fund said that a major attack affecting a vital service or financial institution could undermine trust, and called on policymakers to strengthen capabilities in the field of cybersecurity.
Banks are competing to adopt agent-based AI, which is able to complete tasks with minimal human supervision, while also dealing with the challenges of new paradigms, including IT vulnerabilities identified by Anthropic's Mythos tool.
“The adoption of artificial intelligence is often preceded by the ability to put in place the necessary controls,” said Michael Woodbridge, a London-based cybersecurity partner at Grant Thornton.
