[New York Stock Market] Nasdaq Plunges 2.8% on Semiconductor Stocks' Sharp Decline... Dow Hits Another Record High

"US to Sanction Allies if Semiconductor Trade with China Continues"
Trump Also Says "Taiwan Takes All US Semiconductors"
"Interest Rate Cut Imminent," Fed Officials Speak Out

Semiconductor stocks plunged in the U.S. New York stock market, causing the Nasdaq index to plummet 2.8% in a single day. News that the Biden administration is considering strong export restrictions on allied companies to block China’s access to advanced semiconductor technology worsened investor sentiment in tech stocks, especially semiconductors. Meanwhile, the Dow Jones Industrial Average hit record highs for the third consecutive day.

[Image source=Reuters Yonhap News]

On the 17th (local time), the three major indices closed mixed at the New York Stock Exchange (NYSE). The blue-chip-focused Dow Jones Industrial Average rose 243.6 points (0.59%) to close at 41,198.08, marking a record high for the third consecutive day. The large-cap S&P 500 index fell 78.93 points (1.39%) to close at 5,588.27. The tech-heavy Nasdaq index plunged 512.41 points (2.77%) to close at 17,996.92, recording the largest daily drop since 2022.

By individual stocks, semiconductor-related shares all plummeted. Dutch semiconductor equipment maker ASML dropped 12.74%. Taiwan’s TSMC fell 7.98%. Nvidia declined 6.64%, while Qualcomm and Broadcom fell 8.61% and 7.91%, respectively. Other tech stocks also showed weakness. Apple fell 2.53%, Microsoft (MS) and Tesla dropped 1.33% and 3.14%, respectively.

The news that the Biden administration might impose additional regulations on semiconductor companies dragged down semiconductor stocks. According to Bloomberg, the U.S. government has notified officials from the Dutch ASML and Japan’s Tokyo Electron that additional sanctions could be imposed if they continue to allow China access to semiconductor technology. Measures under consideration include the Foreign Direct Product Rule (FDPR), which requires U.S. government approval for exports if U.S.-origin software, equipment, or technology is used in products made abroad.

Additionally, remarks by Republican presidential candidate and former President Donald Trump regarding Taiwan dampened investor sentiment in semiconductor stocks. In an interview with Bloomberg the previous day, Trump stated that Taiwan should share defense costs with the U.S. for its own defense. He also criticized the Biden administration’s subsidies to overseas companies, including Taiwan, through the CHIPS and Science Act (CSA). Trump said, "Taiwan has taken all our semiconductor business," adding, "We are now giving billions of dollars to build new semiconductor factories in Taiwan, and while they will build them here, they will eventually take them back to their own country."

Bespoke Investment Group analyzed, "Typically, the impact of this kind of news does not last long," but also noted, "It is worth paying attention to the fact that semiconductor stocks have underperformed the overall market in recent weeks."

Meanwhile, Federal Reserve (Fed) officials have repeatedly made remarks suggesting an imminent interest rate cut, supporting expectations for a rate cut in September.

Christopher Waller, a Fed governor classified as a "moderate hawk" (favoring monetary tightening), said at a Kansas City Fed event that "while we have not reached the final destination, we are getting closer to the point where we need to cut the policy rate." John Williams, president of the New York Fed, said in an interview with The Wall Street Journal (WSJ) the previous day that inflation indicators over the past three months are "getting closer to the disinflation trend we are looking for," calling it a "positive sign." Following Fed Chair Jerome Powell’s earlier remarks expressing increased confidence that inflation is moving toward 2%, Fed officials are signaling that policy changes are imminent.

The Fed’s Beige Book, a report on economic conditions released that day, also confirmed a slowdown in economic activity that could provide a basis for rate cuts. According to the report, among the Fed’s 12 districts, economic activity increased somewhat in seven districts, while five districts experienced flat or declining activity. In the May Beige Book, only two districts reported flat or declining activity, so the number has increased by three. The Fed also stated, "Due to uncertainties surrounding elections, domestic policies, geopolitical conflicts, and inflation, growth is expected to slow over the next six months."

The market has priced in a rate cut in September as a given. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds futures market fully reflects a 100% probability that the Fed will cut rates by at least 0.25 percentage points at the September Federal Open Market Committee (FOMC) meeting. The probability of a 0.5 percentage point or greater cut in December is 97.1%.

U.S. Treasury yields were slightly lower. The benchmark 10-year U.S. Treasury yield stood at 4.15%, and the 2-year Treasury yield, which is sensitive to monetary policy, traded slightly down at 4.44% compared to the previous day.

International oil prices rose due to a decrease in U.S. crude oil inventories. West Texas Intermediate (WTI) crude oil closed at $82.85 per barrel, up $2.09 (2.6%) from the previous day, while Brent crude, the global benchmark, rose $1.35 (1.6%) to close at $85.08 per barrel.