U.S. and Taiwan Stocks Tumble Together
On October 30, Taiwan stocks plunged as much as 1,642 points intraday, closing down 1,156 points at 45,211, down 2.49%, falling below the half-year moving average. Foreign investors sold a net of over NT$110 billion in a single day, TSMC fell NT$45, with a cumulative October drop of 2,728 points. On the previous day, the 29th, the Nasdaq fell 1.38% and the Philadelphia Semiconductor Index fell 1.42%, with selling pressure triggered by third-quarter earnings reports from Alphabet and Amazon.
Giants Spending Faster Than They Earn
On October 28, Alphabet reported third-quarter earnings, spending US$51.4 billion in a single quarter to build AI data centers, spending more than its core business brought in, with free cash flow turning negative for a second straight quarter and the share price plunging over 12%. With cash running short, it had to borrow from the market, with long-term debt expanding to nearly six times the level a year ago, raising nearly US$29 billion in a single quarter through bond issuance, equivalent to NT$940 billion. Amazon's free cash flow swung from positive to negative over the past year, with a shortfall of US$42.4 billion that had to be filled by borrowing, and its share price tumbled about 10% in after-hours trading. Combined capital spending by Alphabet, Amazon, META and Microsoft has climbed from US$140 billion in 2023 to US$700 billion this year, and is set to exceed US$1 trillion in 2027. Goldman Sachs estimates about 35% of 2027 capital spending will have to be funded by debt, Morgan Stanley estimates 2027 will see the largest cash shortfall, and so far none of the four has announced cuts to capital spending.
Interest Rates and Oil Prices Are Key
The 10-year U.S. Treasury yield was still only 3.96% the day before the Iran war broke out, but surged past 5% in just a few months, at one point hitting a high since 2002. Taking Oracle as an example, its most recent quarterly interest expense surged 55% from a year earlier. Besides the mounting U.S. government debt keeping rates high, another driver is inflation ignited by war in the Middle East. According to the New York Times, the U.S. and Israel are planning another military strike on Iran after the November 3 midterm elections, potentially targeting energy facilities. Brent crude, which had fallen below US$97 per barrel in early October, had risen above US$112 by the 30th. U.S. September consumer prices rose 3.7% year-on-year, above expectations, while producer prices in the same month surged 6.3%, the largest increase since 2022. The Federal Reserve raised rates in September for the first time in three years, held steady in October, but two officials favored another hike, with markets now pricing in more than a 70% chance of another hike in December. Credit spreads for weaker-credit emerging cloud operators such as CoreWeave continued to widen, with some even facing difficulty issuing bonds.
Watch the Funding Tide Before 50,000 Points
Twenty years ago, after the telecom bubble burst, Google, founded less than seven years earlier, bought up idle fiber-optic networks across the U.S. in early 2005, when the industry firmly believed Internet traffic doubled every 100 days. After the Federal Reserve raised rates repeatedly in less than a year, funding receded and operators went bankrupt one after another. Now the roles are reversed, the giants have still not pulled back, and Taiwan's supply chain continues to report strong orders, but the root cause on rates has not faded and funding costs are hard to ease. Taiwan stocks still have a chance to reach 50,000 points, with the market swinging between joy over full order books and fear of receding liquidity. Who can survive the costly wait will only become clear once the tide of interest rates recedes.