AI Selloff Hits Global Stocks as Chip Index Drops 6.7%

The Philadelphia semiconductor index fell 6.7% overnight — its worst day since June — as a fresh wave of selling hit AI-linked stocks from Tokyo to New York. The S&P 500 dropped 1.2%, its weakest performance since July. The tech-heavy Nasdaq lost 2.6%, its biggest fall since June. Japanese and South Korean markets, lifted for months by AI exposure, fell before recovering to trade broadly flat.

Jim Reid of Deutsche Bank said the market's pressures collided at once. He cited three forces: stress around France, where the Franco-German 10-year spread widened by 14.8 basis points — the biggest daily move since March 2020; the AI selloff itself; and rising oil prices, with Brent crude up 4.00% to a five-month high of $113.17 per barrel.

Where did the money go?

It went into US Treasuries. The 10-year Treasury yield fell 16.6 basis points to 4.95%, its biggest daily decline since August 2024. Reid said: "In the midst of all these market pressures, an interesting theme was the flight to US Treasuries, which returned to its traditional risk-off role in periods of turmoil."

The bond rally came despite strong US data. Initial jobless claims fell to a three-month low of 194,000 in the week ending October 17, against 200,000 expected. The four-week moving average hit its lowest since September 2022. Reid argued this showed financial stress, not fundamentals, was driving sentiment.

Is the AI bubble bursting?

Ipek Ozkardeskaya, an analyst at Swissquote, thinks the evidence points that way. "Given the more than 50% retreat in memory chipmakers' share prices from their peaks, we could now argue that their exponential rise was a bubble, and that the bubble has burst," she said.

Her comparison is stark. Samsung and SK Hynix trade at forward earnings multiples of roughly 3–4 times, despite continued strong AI-related demand for their chips. In her words: "Alas, buyers are nowhere to found."

Investors will watch closely next week, when Microsoft, Google, Amazon and Sandisk all report results. Those numbers will test whether the selloff reflects fading demand or pure sentiment.

How weak is the UK consumer?

British retail sales fell 0.4% in September, official figures showed on Friday, against expectations of a 0.1% drop. An unseasonably warm start to autumn hurt online clothing vendors, and supermarket volumes also declined.

The details cut both ways. Paul Dales, chief UK economist at Capital Economics, noted the fall followed a revised-up 0.7% rise in August, and fuel sales rose 2.2% as households filled tanks before prices climbed. Total sales still rose a decent 0.7% quarter-on-quarter in Q3.

But the confidence data alarms him. GfK's consumer confidence index plunged 11 points in October to -24, a six-month low and the fastest fall outside the pandemic since the Brexit vote in July 2016. "That shows that rising fuel and utility prices, higher borrowing costs and the fear of tax rises in the budget are taking a bigger toll on households," Dales said. He expects real consumer spending and real GDP to grind to a halt in Q4 and Q1.

Thomas Pugh, chief economist at RSM UK, said the data "raises the risk that the economy's recent run of resilience might be coming to an end," adding that nervousness ahead of a likely tax-raising budget may also be biting.

Neil Bellamy, consumer insights director at GfK, pointed to "relentless cost-of-living pressures" against a backdrop of regional conflicts feeding domestic inflation now at 3.5%.

What does this mean for Christmas?

For retailers, the stakes are high. Jacqueline Windsor, head of retail at PwC UK, noted that consumers spent over 30% more on petrol than last September, leaving less for other goods. With most retailers booking the bulk of sales in the final three months of the year, she warned: "the upcoming peak season remains on a knife edge."

The week ahead brings flash PMI readings for the Eurozone, UK and US, Russia's interest rate decision, and the University of Michigan's US consumer confidence index — followed by the budget on Wednesday.