Jobs data trigger an AI air pocket

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A two-month long stock market rally flew into unwelcome turbulence either side of the weekend as stronger than expected jobs data on Friday triggered fears that the next move for US interest rates might, unexpectedly, be up not down.

A 4% drop in the tech-dominated Nasdaq index on Friday spilled over into heightened volatility in Asian markets on Monday morning, with the chip-stock focused Korean Kospi index hardest hit. After a near 9% decline, fuelled by double-digit declines for Samsung and SK Hynix, trading in the Korean market was briefly suspended as so-called circuit breakers were implemented.

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Baptism of fire

The market wobble, which saw the S&P 500 shed 2.6% on Friday at the end of what would have been a tenth week of rising prices, was prompted by an unexpectedly strong set of jobs data, which showed 172,000 new jobs were created in America in May.

That was twice the 85,000 expected and accompanied upward revisions in the data for March and April. It cemented the view that the Fed may have to raise rather than cut interest rates over the rest of 2026, despite ongoing calls from President Trump for lower borrowing costs.

Rising inflation and a buoyant labour market are providing a stiff test for new Fed chair Kevin Warsh, who will preside over his first rate-setting meeting at the Fed next week. Warsh was nominated by the President on the back of his apparent preference for lower interest rates, so it would be ironic if changing circumstances forced him to open his account with a rate hike instead.

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K-stop

The plunge in Korea follows a more than doubling of the Kospi index so far in 2026 as investors have piled into a market seen as a cheaper way of playing the AI market boom. Despite its powerful rally, Korea remains a much less highly valued market than the US.

The surge in the Kospi has been fuelled in large part by retail investors who have been encouraged by the Korean government to invest in shares. The market has been further boosted by the use of highly speculative leveraged ETFs which have allowed inexperienced investors to benefit from magnified gains on the way up but at the risk of big losses in any market correction.

Other Asian markets tumbled as the week got underway. Taiwan’s Taiex index fell by 6% before recovering to close 3.5% lower. Japan’s Nikkei 225 index was 4% down.

By the time European markets opened for trading, things had settled a bit, with the region’s markets less exposed to the tech theme and more influenced by a rise in the oil price over the weekend as tensions rose in the unresolved Middle East conflict.

Gulf widens

The cost of a barrel of Brent crude rose 3% to $96 after an exchange of missiles between Israel and Iran in defiance of calls from President Trump to keep the region’s fragile ceasefire intact.

Israel launched an attack on Hezbollah targets in the Lebanese capital Beirut over the weekend, despite the US President’s call for restraint. That prompted retaliatory strikes by Tehran. A clear gap is opening up between the war aims of the White House, in the face of declining domestic support for action in the Gulf, and Israel, which continues to pursue a reshaping of the balance of power in the Middle East.

Two-way pull

Another divergence is evident in financial markets, where strong earnings growth, high profit margins and narrow credit spreads continue to boost markets, but inflation fears, potentially rising interest rates and increasingly competitive bond yields are pulling shares in the opposite direction.

So far, investors have preferred the glass half full story and put their fears to one side. But four months into the intractable conflict in the Middle East, the continuing shutdown of the Strait of Hormuz, persistently above-target inflation and cracks in the superficially strong US economy are making the risks more apparent.

Seeking safe havens

Investors looking for a port in the storm, are searching in vain this week. With bond yields rising back towards 5%, fixed income and equity markets are becoming more correlated. Higher bond yields are bad news for bond prices but also provide a tailwind for shares as risk-free returns look more attractive than the potential gains in volatile equities.

At the same time, traditional diversifiers such as gold and bitcoin are propping up the returns league table. Gold, which looks increasingly uncompetitive from an income perspective as bond yields rise, fell 1% after the weekend to $4,285 an ounce. Bitcoin, which has halved in value since last October, dipped below $60,000 before settling at $63,000.

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