[New York Market Watch]Equity Markets Weaken as 'Bubble Theory' Resurfaces—Bonds, Dollar Gain

(Seoul=Yonhap Infomax) International Economics Department = On the 20th (U.S. Eastern Time), all three major U.S. stock indices closed lower in New York financial markets. Renewed concerns over an 'artificial intelligence (AI) bubble' and warnings from senior Federal Reserve (Fed) officials about the risk of a sharp decline in financial assets triggered a sell-off in technology stocks.

U.S. Treasury prices rose, led by short-term maturities. The U.S. unemployment rate for September climbed to its highest level in four years, reviving expectations for Fed rate cuts, while the sharp intraday drop in equities further supported bond prices.

The U.S. dollar edged higher, extending its gains for a fifth consecutive session. Although the greenback faced downward pressure following the September employment report amid concerns of a cooling labor market, it reversed course as risk aversion intensified following the equity market's steep decline.

New York oil prices fell for a second straight session on hopes for an end to the war in Ukraine. Ukraine announced it had received a draft peace proposal from the U.S. for talks with Russia and was ready to discuss it, putting downward pressure on crude prices.

According to the U.S. Department of Labor, the September unemployment rate rose 0.1 percentage point from the previous month to 4.4%, the highest since October 2021. Nonfarm payrolls increased by 119,000, beating market expectations (50,000), but the previous two months' figures were revised down by 33,000.

According to the CME FedWatch Tool, as of 15:58 in New York, the federal funds rate (FFR) futures market reflected a 39.6% probability of a 25bp rate cut by the Fed in December, up from 30.1% the previous day.

Equity Markets

On the 20th (U.S. Eastern Time), the Dow Jones Industrial Average closed down 386.51 points (0.84%) at 45,752.26 on the New York Stock Exchange (NYSE).

The S&P 500 Index fell 103.40 points (1.56%) to 6,538.76, while the Nasdaq Composite dropped 486.18 points (2.15%) to 22,078.05.

The Philadelphia Semiconductor Index, comprising AI and semiconductor-related stocks, plunged 4.77%.

At the open, New York equities rallied on the back of Nvidia's 'big surprise' earnings. The Nasdaq rose as much as 2.58% intraday, the S&P 500 climbed 1.93%, and the Dow gained up to 1.56%.

The September U.S. employment report, which boosted expectations for Fed rate cuts, also provided early support. The unemployment rate rose 0.1 percentage point to 4.4%.

However, from around 11:00 AM, the market reversed sharply.

Renewed concerns over an AI bubble triggered a wave of selling in technology stocks.

Senior Fed officials involved in rate decisions also referenced bubble risks.

Fed Governor Lisa Cook stated, "Our assessment is that asset valuations across several markets—including equities, corporate bonds, leveraged loans, and housing—are elevated relative to historical benchmarks."

She added, "At present, my impression is that the likelihood of a significant decline in asset prices has increased."

Matt Maley, chief market strategist at Miller Tabak, commented, "The market is questioning whether AI can deliver the earnings currently priced in," adding, "Investors are concerned whether today's massive AI investments will yield profits five years from now." He noted, "That's why some are deciding to take profits."

There was also analysis that Nvidia, the leading AI stock, is excessively overvalued.

Deutsche Bank analyst Ross Seymore explained that even with his target price of $215 for Nvidia, assuming 85% revenue growth over the next two years, the price-to-earnings ratio (PER) would still be about 23 times.

Kimberly Forrest, CIO at Bokeh Capital Partners, said, "The increase in Nvidia's accounts receivable seems to be making investors uneasy," adding, "If the products are selling so well, it's questionable why cash isn't coming in on time."

According to Nvidia's quarterly report, as of October 26 (end of Q3 FY2026), accounts receivable stood at $33.4 billion, up 45% from $23.1 billion on January 26. This indicates a growing amount of unpaid receivables.

As market concerns mounted, the Nasdaq fell as much as 2.31% intraday, the S&P 500 dropped 1.63%, and the Dow slid 0.89%. The S&P 500 alone saw over $2 trillion in market capitalization wiped out from its peak in a single day. The Dow and Nasdaq each saw swings of over 1,000 points between their highs and lows.

By sector, all segments declined except for consumer staples (+1.11%). Technology (-2.66%), consumer discretionary (-1.73%), industrials (-1.70%), materials (-1.62%), and communications/energy (-1.07%) all fell by more than 1%.

Nvidia, which had surged over 5% intraday, ended down 3.15%.

Semiconductor stocks including Intel (-4.24%), Micron Technology (-10.87%), and AMD (-7.87%) all plunged.

Strategic Digital, linked to Bitcoin prices, dropped 5.02%.

Walmart, a consumer staples giant, jumped 6.46% after raising its annual earnings outlook.

The CBOE Volatility Index (VIX) surged 2.76 points (11.67%) to 26.42.

Bond Markets

According to Yonhap Infomax's overseas rates intraday screen (screen no. 6532), as of 15:00 (U.S. Eastern Time) on the 20th, the 10-year U.S. Treasury yield was 4.1050%, down 2.70bp from the previous day's 15:00 close.

The 2-year yield, sensitive to monetary policy, fell 4.00bp to 3.5580% over the same period.

The 30-year yield, the longest maturity, dropped 2.00bp to 4.7310%.

The yield spread between the 10-year and 2-year widened from 53.40bp to 54.70bp.

Bond yields and prices move inversely.

U.S. Treasury yields entered New York trading with modest gains but swung sharply after the September employment report was released at 08:30. When nonfarm payrolls—the 'headline' figure—came in much higher than expected, yields spiked, but quickly reversed lower as focus shifted to the unemployment rate. The Fed's quarterly economic outlook uses the unemployment rate as a key labor market metric.

Olu Sonola, head of U.S. economic research at Fitch Ratings, said, "The upside surprise in nonfarm payrolls is positive, but it likely has a negative impact on the outlook for a December rate cut."

He added, "The slight rise in the unemployment rate complicates the choice between stronger job growth and higher unemployment—good news may not be as good as it seems."

Stephen Stanley, chief economist at Santander US Capital Markets, noted, "The unemployment rate is trending higher, but for the 'right' reasons—labor force participation is rising much faster than job growth." The participation rate for September was 62.4%, up 0.1 percentage point from the previous month.

Separately, the weekly jobless claims report showed that for the week ending the 15th, initial claims fell by 8,000 to 220,000 on a seasonally adjusted basis, remaining historically low.

U.S. Treasury yields moved lower in late morning as equities reversed sharply. The Nasdaq, which had surged as much as 2.6% earlier, turned sharply lower in the afternoon session.

At 13:00, a $19 billion auction of 10-year Treasury Inflation-Protected Securities (TIPS) saw weaker-than-expected demand, with the yield awarded above market expectations.

According to the U.S. Treasury, the 10-year TIPS was awarded at a yield of 1.843%, up 10.9bp from the previous auction's 1.734% in September. The bid-to-cover ratio was 2.41, higher than the previous auction's 2.20 and above the prior three-auction average of 2.32. The awarded yield was about 1.9bp above the when-issued yield, indicating a higher-than-expected result.

Foreign Exchange Markets

According to Yonhap Infomax (screen no. 6411), as of 16:00 (U.S. Eastern Time) on the 20th, the dollar-yen exchange rate stood at 157.577 yen, up 0.614 yen (0.391%) from the previous New York close of 156.963 yen.

The dollar-yen briefly approached 157.9 yen, testing the 158 level for the first time since mid-January.

The euro-yen rate was 181.63 yen, up 0.720 yen (0.398%) from 180.91 yen. The euro-yen briefly surpassed 182 yen for the first time ever. The yen has been hitting record lows against the euro since the euro's inception.

The euro-dollar rate was 1.15261, down 0.00001 (0.001%) from 1.15262, marking a fifth consecutive session of declines.

The DXY index rose 0.061 points (0.061%) to 100.251 from 100.190, reaching as high as 100.380—the highest since late May.

The DXY swung sharply around the release of the U.S. September employment report at 08:30. Nonfarm payrolls, the 'headline' figure, beat expectations, but the unemployment rate unexpectedly rose, creating mixed signals.

As market focus shifted to the unemployment rate, the DXY retreated to 100.028. The probability of a Fed rate cut next month, as reflected in rate futures, rose to around 40%.

As New York equities tumbled in late morning, the DXY rebounded.

Juan Perez, trading director at Monex USA, said, "This (September jobs data) is overwhelming in its mixed signals, presenting an incomplete picture of the labor sector," adding, "Both the modest job growth and the high level of job opportunity losses indicated by revisions are present."

The yen, traditionally a safe-haven currency, failed to strengthen significantly even as U.S. equities turned sharply lower. The dollar-yen fell near 157.3 yen before rebounding.

Steve Englander, head of G-10 FX research at Standard Chartered, commented on possible Japanese intervention: "There is a level, but we don't know what it is," adding, "Japanese authorities may wait for the market to weaken the yen further before deciding to intervene."

The pound-dollar rate was 1.30700, up 0.00204 (0.156%) from the previous close. The offshore dollar-yuan (CNH) rate was 7.1183, up 0.0003 (0.004%).

Oil Markets

On the 20th (U.S. Eastern Time), December West Texas Intermediate (WTI) crude on the New York Mercantile Exchange settled at $59.14 per barrel, down $0.30 (0.50%) from the previous close. After the close, the front-month contract rolls to January delivery.

On the day, Ukraine announced it had received a draft peace proposal from the U.S. for talks with Russia and was ready to discuss its contents with the U.S.

President Volodymyr Zelensky met with U.S. Army Secretary Dan Driscoll and said, "Peace is essential, and we appreciate President Trump's and his team's efforts to restore European security," adding, "We are ready for constructive, candid, and effective cooperation."

Speculation that the war in Ukraine could end surged after U.S. online outlet Axios reported on the 18th that the Trump administration was secretly discussing a new peace proposal with Russia. WTI plunged more than 2% the previous day on the news.

Phil Flynn, senior analyst at Price Futures Group, noted, "Many thought this new proposal would be dismissed as soon as it was delivered to President Zelensky, but he did not outright reject it." He added, "The key question now is whether (Russia) sanctions will take effect tomorrow. If the effective date is imminent, they could be lifted or delayed."

U.S. sanctions on companies trading with Russian oil majors Rosneft and Lukoil take effect the following day.

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