Asian equities staged a powerful rebound on Friday, with South Korea's Kospi surging as much as 16.5% and Japan's Nikkei 225 climbing over 5%, after robust earnings from Microsoft and Amazon reignited confidence in artificial intelligence spending. Taiwan's Taiex also jumped more than 7%, following a strong Wall Street session led by technology shares.
The rally marks a sharp reversal from earlier in the week, when a violent sell-off knocked the Kospi to its worst monthly performance since 1997. Despite Friday's gains, the index remains nearly 25% lower for July and well below its June peak, suggesting the move is more a violent repricing than a return to stability.
AI spending shows returns
The rebound was fueled by evidence that heavy investment in data centers and chips is translating into faster cloud growth. Microsoft reported quarterly revenue of $90 billion, up 18%, with Azure sales rising 43% and Microsoft Cloud revenue up 27% to $59.3 billion. Amazon added to the optimism, with AWS revenue growing 37% to $42.2 billion—its fastest pace in 18 quarters—while group sales rose 20% to $200.6 billion. The company also lifted its 2026 capital-spending plan to about $220 billion, signaling that demand remains strong enough to justify further infrastructure investment.
IG market analyst Fabien Yip noted that the earlier sell-off had become exaggerated because the underlying AI demand story had not materially weakened. Deutsche Bank strategists viewed the correction as a reset in expectations after an exceptional rally rather than a breakdown in the investment case.
However, investors are no longer rewarding AI spending by default. Microsoft's cash generation and Amazon's accelerating cloud growth showed that some of the largest programs are producing measurable returns, but the sector still faces the question that triggered the rout: whether capital expenditure can keep rising without weakening free cash flow or returns on invested capital.
Korea's comeback still fragile
Samsung Electronics and SK Hynix led the reversal after suffering historic losses earlier in the week. Their rebound helped lift the Kospi, but the index remains well below its June peak. South Korean authorities have already tightened oversight of leveraged single-stock products after the sell-off amplified losses for retail investors.
The rally may need more than strong US earnings to last. Investors will watch margin balances, foreign flows, and whether chipmakers can sustain pricing as Chinese competitors expand. The recent whipsaw in Asian markets highlights the fragility of the recovery.
Yen and bond market risks persist
The yen weakened about 0.8% to 160.76 per dollar after the Bank of Japan kept its policy rate at 1% in an 8-1 decision. Board member Hajime Takata favored a quarter-point increase, but the central bank offered limited guidance on the timing of another move. The decision followed suspected coordinated currency intervention that had driven the yen sharply higher on Thursday.
SMBC analysts said the hold was expected, although Takata's dissent increased the possibility of an October increase. Capital Economics argued that intervention alone may struggle to deliver a lasting yen recovery without firmer monetary support.
Bond markets provide another warning. Long-dated US Treasury yields remained near 19-year highs even as short-term yields eased, reflecting concern that inflation expectations are becoming harder to anchor. Oil fell despite fresh threats to Middle East shipping, with Brent near $88 a barrel. The restrained reaction prevented another inflation shock, but it also underscored how quickly geopolitical risk could return.
Friday's rally repaired confidence in the AI trade, but it did not remove the currency, rates, and geopolitical risks that made Asia's sell-off so severe. Investors should remain cautious about the sustainability of this rebound, especially with market fear indicators still elevated.
This article is for informational purposes only and does not constitute financial advice.
