Asia Markets Rebound as Indonesia's 11% Slump Deepens; AI-Linked Volatility Persists

Asian equities staged a partial recovery on Friday, Oct. 16, after heavy selling triggered by concerns over the financing of the artificial intelligence boom, but Indonesia suffered a severe confidence shock as MSCI warned it may downgrade the country from emerging-market status.

Japan's Nikkei 225 rose 1.4% to 65,324.29, recouping some of Thursday's nearly 5% tumble, according to one report, while other reports put the gain at 1.9% or 1.3%. South Korea's Kospi rebounded, with reports showing gains ranging from 1.2% to 3.3%, following a near 8% plunge on Thursday that triggered temporary circuit breakers. Taiwan's Taiex edged up 0.3%, Hong Kong's Hang Seng rose 0.4% to 1%, and mainland Chinese blue chips were little changed.

The rebound followed a tech-led sell-off earlier in the week driven by worries about higher US interest rates and the cost of financing AI investments. Shares of Nvidia-backed cloud company CoreWeave slumped after reports that its bond yields reached levels associated with distressed debt, according to Reuters. Analysts also pointed to pressure on memory maker shares after China's ChangXin Memory Technologies (CXMT) reported progress on a next-generation DRAM architecture, Reuters reported.

**Indonesia's Market Shock**

Indonesia's Jakarta Composite Index fell more than 10% on Friday, with multiple reports putting the decline at 11% or 11.6% – the largest single-day drop since the 1998 Asian financial crisis. The rout came after MSCI said the stock market no longer merited "emerging market" status and was considering shifting Indonesia to "standalone" status, a category that includes Lebanon and Zimbabwe.

"The proposal highlights MSCI's dissatisfaction with the pace of reforms and raises further questions about the investability of the market," said Tan Altundag, investment manager for emerging equities at Pictet Asset Management, as quoted by Reuters. "The investment implications could be significant."

MSCI had threatened a downgrade to "frontier" status in January over opacity in ownership and trading behavior, but said on Friday that a lack of progress meant even a drop to that status would not reflect the severity of the issues.

**Crisis Deepens on Monday**

The sell-off extended into Monday, Oct. 19, with Jakarta's benchmark index falling over 5% to a six-year low. The Indonesia Stock Exchange cut its lower auto-rejection limit to 7% from 15% to slow the selling, saying it would give investors "an opportunity to evaluate and digest available information."

Indonesia's financial regulator on Friday unveiled sanctions against those linked to alleged trading manipulation in shares of three firms, with fines totaling 2.1 trillion rupiah ($116.4 million). "The fines are a positive move, but there needs to be concerted action to stamp the authority of the OJK and take direct action against certain well-known players," said Angus Mackintosh, an ASEAN specialist at Aletheia Capital, as reported by multiple outlets.

President Prabowo Subianto was expected to meet with top financial officials, including the sovereign wealth fund Danantara and the Financial System Stability Committee, to discuss the "current economic condition," according to two government sources cited by Reuters. The government has faced a series of setbacks this year, with Moody's and Fitch cutting their sovereign rating outlooks to negative.

**Capital Flight Risks**

Goldman Sachs strategists wrote that "the burden of proof has shifted: avoiding reclassification will require clear evidence that the announced reforms have been consistently implemented and materially improved market functioning." They estimate a full MSCI removal could trigger $5.6 billion of passive outflows, while active funds benchmarked to these indexes hold more than $8 billion.

Foreign investors have net sold $4.88 billion worth of Indonesian stocks so far this year, on track for the biggest annual outflow in at least 16 years. The rupiah weakened to 18,040 per dollar, not far from the record low of 18,190 hit in June, while the 10-year government bond yield rose to 7.4% from 7.169% on Friday.

"Our bigger concern is not index-related selling itself, but the potential near-term spillover into the rupiah and domestic bond yields, where market dislocation could translate into tighter financial conditions and a more meaningful impact on the real economy," said Gary Tan, portfolio manager at Allspring Global Investments, as quoted by Reuters.

**Broader Market Context**

The dollar limped toward its first weekly loss in five weeks as lower US yields eroded its appeal, with the dollar index below 102. Gold edged higher to around $4,173, while Brent crude eased 0.7% to $105.14 a barrel amid Middle East tensions and potential US steps to ease sanctions on the "shadow fleet" of oil tankers.

Federal Reserve Chair Kevin Warsh voiced optimism about US economic strength at IMF/World Bank meetings in Bangkok on Friday but gave little away on rate hikes, repeating that he does not "prejudge meetings," according to Reuters. US consumer prices rose 0.6% in September and 3.7% year-on-year, reinforcing expectations of tighter monetary policy.

"Global markets are getting very noisy once again after a period of low volatility: Wall Street is whipsawing, bond yields are swinging, currency markets are doing backflips," wrote Kyle Rodda, a markets analyst at Capital.com, in a client note cited by Reuters. "Global markets could potentially be in for a protracted period of this sort of volatility."