AI tigers roar: asian tech soars past records as bond markets buckle under oil shock

By early 2026, Asian tech markets, particularly in South Korea, Taiwan, and Japan, have led a robust AI-driven equity rally that has propelled major indices like South Korea's KOSPI to historic highs, including clearing the 7,000 mark for the first time. This surge is anchored by semiconductor and AI chip companies such as Samsung Electronics, which surged 12% to surpass a $1 trillion market value, and SK Hynix, which is on the cusp of joining the trillion-dollar club. The rally reflects extraordinary earnings growth fueled by aggressive capital expenditures from U.S. hyperscalers meeting soaring AI demand, with tech capex now exceeding 50% of total S&P 500 capex and contributing significantly to economic growth, pushing computer equipment investment above 1.2% of GDP—levels not seen since the dot-com era.

The semiconductor sector’s dominance is underscored by a historic Long Semis/Short Software trade, with the relative strength of semiconductors reaching extreme levels as measured by the SMH/IGV ratio. This intense focus on chipmakers is supported by soaring prices in memory products—NAND prices rose 47% in a month—and real-time AI capex flows through customs, reflecting the critical role of AI infrastructure chips in driving market gains. Companies like Advanced Micro Devices (AMD) have seen their shares jump over 16% after forecasting second-quarter revenues above expectations, highlighting the global scale of this AI chip demand that is fueling the rally across Asian and U.S. markets alike.

This AI-driven momentum extends beyond pure tech hardware into traditional sectors such as power, infrastructure, and energy, which now account for a significant share of AI investments, thereby supporting cyclical stocks over defensives. The resulting capital flows have generated unprecedented current account surpluses in the so-called 'AI Tigers'—Taiwan, South Korea, and Japan—totaling half a trillion dollars annually. These surpluses are predominantly reinvested in U.S. dollar assets, reinforcing cross-border capital flows that underpin equity market strength despite volatility in bond markets and external pressures like hawkish central bank policies and elevated oil prices.

Investor confidence remains unwavering amid geopolitical uncertainties, with the AI theme continuing to dominate Asian markets despite challenges such as high oil prices above $100 a barrel and ongoing tensions surrounding the Iran conflict. The resilience of AI-related tech shares is evident as major indices in South Korea, Taiwan, and Japan hover near or at record highs, driven by record profits from semiconductor giants like SK Hynix, which has surged over 1,000% since early 2025. As Rushil Khanna of Ostrum notes, the earnings growth trajectory in Asian tech hardware and semiconductor sectors exceeds anything seen in recent memory, underscoring the transformative impact of AI investments on market dynamics.

The surge in oil prices, nearly doubling year-to-date amid Middle East geopolitical tensions, has reignited inflation fears globally, pushing central banks such as the ECB, BoE, Fed, and BOJ toward hawkish stances. While many kept rates on hold in late April, they signaled readiness to hike if inflation persists, with U.S. CPI hitting 3.3% year-over-year—the highest since 2024—and expectations of climbing toward 4%. This hawkish pivot has directly pressured bond markets, exemplified by the 10-year Japanese Government Bond yield topping 2.5% for the first time since 1997, reflecting heightened volatility and investor anxiety over sustained inflation and tighter monetary policy.

Despite the inflationary backdrop and central banks’ tightening bias, equity markets—especially Asian tech shares buoyed by AI enthusiasm—have rallied robustly, creating a stark divergence from the bond market’s turmoil. This contrast underscores a bifurcated investor sentiment where equities are viewed as growth engines amid geopolitical uncertainty, while fixed income markets grapple with rising yields and volatility as hawkish policies dampen bond valuations. As noted, the bond market bulls were 'annihilated' by soaring benchmark yields, even as tech stocks surged, illustrating the complex interplay between inflation-driven monetary tightening and sector-specific optimism.

Adding complexity to the inflation narrative, Brent crude prices exhibited volatility, fluctuating between $88.66 and $102.70 before settling near $100 a barrel in early May, influenced by ceasefire hopes and Iran’s rejection of U.S. proposals. This price gyration feeds into central banks’ cautious hawkishness, with the ECB explicitly signaling potential rate hikes in June if inflation fails to abate. Concurrently, geopolitical tensions, including the ongoing Iran conflict and UK political instability, are amplifying market volatility, particularly pressuring government bonds and sterling, thereby intertwining energy price shocks with broader macroeconomic and geopolitical risks.

Despite escalating Middle East tensions, investor sentiment in Asian and US markets has demonstrated a notable detachment, quickly pricing in worst-case geopolitical scenarios and embracing a 'buy the dip' mentality. Fund manager Patrick Boyle encapsulated this mindset, observing that traders view the closure of critical energy chokepoints as buying opportunities rather than deterrents, reflecting a broader market tendency to become 'bored' waiting for geopolitical events to unfold and rapidly discounting risks.

Recent progress toward a U.S.-Iran agreement and a temporary pause in Strait of Hormuz operations have significantly eased Middle East tensions, catalyzing a surge in Asian equities and a 1.2% drop in Brent crude prices. President Donald Trump's announcement of 'great progress' on a 'final agreement' with Tehran and assurances from U.S. Defence Secretary Pete Hegseth that the ceasefire remains intact have fostered a renewed sense of calm, which, coupled with hawkish central bank moves, has buoyed regional currencies like the Australian dollar to multi-year highs.

The geopolitical landscape remains volatile as renewed clashes between U.S. and Iranian forces and attacks on the UAE test the fragile ceasefire, injecting uncertainty into oil prices and market sentiment. Nevertheless, investors maintain cautious optimism for a lasting peace deal, balancing the immediate disruptions from Trump's 'Project Freedom' military initiatives and Iran's retaliatory strikes with hopes that diplomatic negotiations will stabilize the region and mitigate the energy shock impacting Asian markets.

Anticipation of the high-stakes Trump-Xi summit in Beijing has injected both uncertainty and optimism into Asian markets, with China's yuan strengthening to three-year highs and key indices like the CSI 300 and Hang Seng rallying on hopes for diplomatic progress. The summit's agenda—covering fragile trade relations, the Iran conflict, and U.S. arms sales to Taiwan—places it at the heart of geopolitical developments influencing market dynamics, where even a maintenance of the status quo could be perceived positively amid ongoing tensions and trade threats, such as Trump's warnings of higher EU tariffs.