A 10% Kospi plunge sparked the rout, and markets now brace for a more hawkish Fed
A 10 percent plunge in South Korea's Kospi triggered a global tech selloff that dragged the TSX into the red on Tuesday.
Investors questioned debt-funded AI spending and prepared for a more hawkish US Federal Reserve.
According to Reuters, Canada's main stock index ended down 74.80 points, or 0.2 percent, at 34,927.38, after clawing back much of an earlier drop.
The selling hit on two fronts.
A broader tech selloff is filtering into Canada alongside a drop in commodity prices, Michael Dehal, senior portfolio manager at Dehal Investment Partners at Raymond James, told Reuters.
With the TSX largely commodities-driven, "we're getting hit from both ends of the spectrum," he said.
Sadiq Adatia, chief investment officer at BMO Global Asset Management, told BNN Bloomberg that AI valuations, the SpaceX initial public offering and debt levels were "spooking the markets a little bit at the moment."
The damage centred on semiconductors.
The Philadelphia SE Semiconductor index tumbled 7.9 percent, per Reuters, while Micron Technology and SanDisk, two of the S&P 500's best performers this year, both fell around 13 percent.
Nvidia dropped 4.1 percent and Advanced Micro Devices, Intel and Marvell Technology lost between 5.8 and 9.4 percent.
In New York, the S&P 500 fell 1.4 percent to 7,365.46 and the Nasdaq composite dropped 2.2 percent to 25,587.04, according to AP, while the less tech-heavy Dow slipped 45.87 points to 51,666.84.
AP reported the pullback followed a sharp run, with the S&P 500's tech sector up 25.5 percent over the last three months and 16.6 percent for the year.
As Wall Street's fear gauge, the CBOE Volatility Index, climbed to an over-one-week high, investors rotated into other areas: seven of 10 major TSX sectors gained, led by consumer staples, which jumped 4.1 percent.
Concerns over debt-funded AI spending fed the selloff, Reuters reported, with Elon Musk's SpaceX joining a list of megacaps tapping the bond market to raise capital.
Its shares rose 1 percent on Tuesday but remain down more than 20 percent over three sessions, though still above their IPO price, according to The New York Times.
Thomas Martin, senior portfolio manager at Globalt, told Reuters that recent AI news "raises questions" about the scale of spending, the capital expenditure and the build-out of semiconductor capacity.
Not everyone read it as structural.
Sébastien Mc Mahon, chief economist at iA Financial Group, said in a statement to BNN Bloomberg that the move looked more like a "short-term scare driven by profit taking and overextended short-term positions than anything structural."
He added that he was not changing his "bullish view on AI and tech more broadly." Wedbush's Dan Ives framed the drop as a buying opportunity, telling clients in a note the market would keep hitting "gut check moments" while "the AI Revolution remains in the 3rd inning."
Rate expectations are driving much of the repricing.
Wall Street now sees an 85 percent chance of a Fed hike this year, up from 60 percent a week earlier, AP reported, citing CME Group data.
Traders are increasingly betting on a second hike by December under the new chair, Kevin Warsh, Reuters said.
The Personal Consumption Expenditures Price Index, the Fed's preferred inflation gauge, is due Thursday and is expected to show inflation rose to 4.1 percent in May.
Commodities compounded the TSX's losses.
Copper fell 3.4 percent and gold dropped 1.9 percent as the US dollar climbed to a 13-month high, Reuters reported, while oil eased on US-Iran negotiations, with August US crude settling 0.9 percent lower at US$73.21 a barrel.
BNN Bloomberg said the Canadian dollar traded for 70.42 cents US, down from 70.61 cents US on Monday.
One Canadian name bucked the trend.
Alimentation Couche-Tard Inc. climbed 11.68 percent after its fourth-quarter results beat estimates with the convenience store operator growing profit and revenue even as the Middle East war disrupted global fuel flows.
