Global Market: Japan’s Nikkei plunges nearly 5% as AI stocks tumble on CoreWeave debt concerns

 Japan’s Nikkei 225 plunged as AI-linked stocks led a broad selloff.

The tech-heavy Nikkei 225 fell 4.8% to 64,489.06 at the midday recess, while the broader Topix declined 2.5%, Reuters reported.

AI-related stocks bore the brunt of the selling, with chip equipment makers Advantest and Tokyo Electron tumbling 13.9% and 7.3%, respectively. SoftBank Group, a major investor in AI-focused startups, dropped 9.4%.

The selloff followed stronger-than-expected US consumer price inflation data, which fuelled expectations that the Federal Reserve could raise interest rates sooner than anticipated and keep borrowing costs elevated for longer. Higher interest rates typically weigh on technology companies, particularly those that rely heavily on debt to finance expansion.

On Wednesday, the US Nasdaq Composite fell 1.9% as investors reassessed the outlook for interest rates and the valuations of technology stocks.

Concerns surrounding CoreWeave added to the pressure on AI-linked shares. The company's stock plunged more than 15% despite its chief executive's assurances in an employee memo that its substantial deal backlog was sufficient to cover its debt obligations, Reuters reported.

The developments have also heightened concerns about the sustainability of AI-related capital expenditure and the ability of companies to generate adequate returns on their investments.

According to Reuters, Nomura strategist Wataru Akiyama said concerns about the financial health of AI-related companies had intensified, prompting investors to question the outlook for AI capital spending and the profitability of AI businesses.

The weakness in technology stocks contrasted with gains in defensive sectors. Pharmaceuticals emerged as the Tokyo exchange's best-performing industry group, rising 3.4% as investors shifted towards companies considered relatively resilient during periods of market volatility.

Sumitomo Pharma was the biggest percentage gainer among Nikkei 225 constituents, advancing 13%.

Market breadth remained negative, with 145 stocks declining and 80 advancing among the Nikkei's 225 constituents at the midday break, underscoring the extent of the selloff.