Mideast Tensions Push Oil Higher While AI Warnings Drag Down Tech Shares

Global oil prices experienced a significant jump on Monday, driven by escalating concerns over supply disruptions in the Middle East. This upward movement intensified inflationary pressures, coming just before an anticipated interest rate hike by the Federal Reserve this week. The outlook of elevated borrowing costs in the US further contributed to a sell-off in technology stocks, which was already underway after key figures in the Artificial Intelligence sector advocated for a slower pace of development, citing potential threats to humanity.

Both major crude oil benchmarks, already trading above $100 per barrel, surged by more than three percent at one point on Monday. This came after Saudi Arabia halted operations on its East-West pipeline following drone attacks attributed to Yemen's Houthi rebels, alongside reports of a merchant vessel being struck in the Strait of Hormuz. The Houthis have been consolidating their presence in the Bab Al-Mandab strait, a crucial shipping lane connecting Europe and Asia that serves as an alternative to the Strait of Hormuz.

Adding to the economic strain, the average price of diesel in the United States surpassed $6 per gallon last Friday for the first time, marking a substantial increase for a fuel vital to the transport and agricultural industries. Meanwhile, Oman announced the postponement of discussions between Iran and Gulf nations concerning the future of the strategic waterway, a critical route for a large portion of the world's seaborne oil trade.

Soaring energy expenses have been a primary factor fueling global inflation since the conflict between the US, Israel, and Iran escalated in late February, compelling central banks worldwide to consider increasing interest rates. All eyes are now on the Fed's meeting this week, where a tightening of monetary policy is widely expected. This decision follows recent data indicating that inflation continues to hover significantly above the officials’ two percent target.

Chris Weston, an analyst at Pepperstone, noted that “the Fed meeting sees the swaps market implying a 92 per cent probability of a hike, with 50 basis points of cumulative tightening assumed by year-end.” He added, “Psychologically, a Fed hiking cycle rarely does risk assets many favours, particularly if both nominal and real Treasury yields are breaking to new highs and equity markets continue to find sellers into rallies.” Rodrigo Catril of National Australia Bank further commented that a decision not to hike would “carry credibility risks and, with a hike almost fully priced, a disappointing hold could trigger a Treasury sell-off.”

Expectations for a series of rate increases – with the European Central Bank having already raised rates last week – have negatively impacted equity markets, particularly technology companies reliant on debt to fund their extensive AI investments. Intensifying the sell-off was Anthropic CEO Dario Amodei’s call on Saturday for AI companies to “pace the frontier,” meaning to coordinate a deceleration in the technology’s advancement, to facilitate a better understanding of the emerging risks. A key concern highlighted by Amodei is “recursive self-improvement,” where AI systems could autonomously develop their next generations.

Amodei articulated his fears, stating, “Left unchecked, it could outrun our ability to understand and control these systems, and so must be pursued very carefully, if at all.” His counterparts, Sam Altman of OpenAI and Elon Musk of xAI, publicly endorsed his stance, with Musk remarking, “Dario is right.” These comments followed the resignation of a researcher from Anthropic due to anxieties that the technology might become uncontrollable. Another researcher, who chose not to resign, publicly declared, “we really do earnestly believe AI could kill all humans,” estimating the chances to be greater than “10 per cent within the next decade.”

Despite US President Donald Trump expressing opposition to these remarks and House Speaker Mike Johnson stating, “we don’t need everybody to panic right now,” traders divested their tech holdings on Monday. Tokyo-listed tech investment giant SoftBank saw its shares plummet by over 10 percent, while chipmaker Kioxia dropped more than six percent, and Advantest declined by over two percent. South Korea’s SK hynix and Samsung also experienced sharp declines, as did TSMC in Taipei.

Seoul’s Kospi index led the broader market losses, shedding more than three percent, with Tokyo, Shanghai, Taipei, Wellington, Bangkok, and Jakarta also closing lower. Conversely, markets in Hong Kong, Sydney, Singapore, and Manila recorded gains. London’s market rose in the morning, though Paris and Frankfurt saw slight declines.

Charu Chanana of Saxo Markets observed, “In the short term, these warnings could still weigh on AI and chip stocks.” She elaborated, “Their valuations assume both strong demand and a relentless pace of technological progress. When expectations are this high, even a possible delay can trigger profit-taking. The macro backdrop also makes the sector more vulnerable. High oil prices are adding to inflation concerns, while elevated bond yields reduce the value investors place on profits expected far into the future.” Chanana concluded, “For now, this looks more like a sentiment and valuation shock than a collapse in AI demand. The real warning signs would be cuts to technology investment budgets, cancelled data-centre projects or weaker chip and memory...