Wall Street’s Chip Selloff Goes Global

This podcast is brought to you by ReliaQuest. Cybercriminals are constantly attacking. They want your data. They want your identity. They want your innovation. RelyQuest fortifies your business with agentic defense, AI that detects, contains, and eliminates cyber threats in minutes. It helps your security team move faster at the work that matters most to protect the business now and delivers insights to help them predict what's next. RelyaQuest. Agentic Defense for the Enterprise. Learn more at ReliQuest.com. That's R-E-L-I-A-Q-U-E-S-T.com. A U.S. chip sell-off goes global on signals that China is catching up in the tech arms race. Plus, Senator Mitch McConnell's staff failed to clear up questions about his health or when he'll return to work. And Volodymyr Zelensky heads to the White House amid signs that President Trump now holds him in high esteem. What remains open, however, is whether this shift in vibes in the White House towards Ukraine will translate into a shift in the substance of U.S. policy. It's Tuesday, July 28th. I'm Luke Vargas for the Wall Street Journal. And here is the AM edition of What's News. The top headlines and business stories moving your world today.

Asian stocks have tumbled today as mounting doubts over the cost of the AI buildout triggered a sell-off in tech shares. Those declines followed a broad dip in chip stocks in the U.S. yesterday, with NVIDIA down about 5%. With more, I'm joined by Journal Finance Editor Alex Frangos. Alex, let's start with what is happening today. Some big declines in Asia, notably Japan's Nika, off close to 4%. And the Cospi in Korea seeing a double-digit pullback, its biggest decline in four months and leading regulators to not once but twice halt trading. What is going on here? So what we have is basically huge enthusiasm for chip stocks. You had the... Korean market and other places going up, you know, massively. And now we're in a period where people are questioning their assumptions about the enthusiasm for the AI buildout and about competition for making those chips. We have this Chinese chip maker come out of, it feels like came out of nowhere to become China's most valuable company, CXMT, seen as a big competitor in competition erodes profits. So that's one thing. Then the journal reported yesterday that Nvidia was in talks to provide this $250 billion of backstop financing on OpenAI data center that sent NVIDIA shares down 5%. And then there was a report in the information that a Shanghai company had made progress in creating these ultraviolet lithography tools that are currently the provenance of a Dutch company called ASML. And this Shanghai company, if it really has built, that kind of thing, could definitely give the Chinese a leg up and the tools that are used to create the chips, the most advanced high-end chips. So all of this has people spooked and sending chip stocks way lower. Some of these sources of the market unrest, Alex, are novel. Some aren't, though, especially concerns around circular financing and AI, whether just all of this spending is truly sustainable. And, of course, the impact of Chinese competition on some of the sort of longstanding winners in this space. And yet, I wonder if what is new is that this sort of unease is coming right before we start to see hyperscaler earnings in the next few days. What does that make for in the trading sessions to come? Yeah, I mean, I think investors are concerned that the big hyperscalers are going to, you know, say that they're going to be spending a lot more and making a lot less money. And we saw that kind of a preview of that with Google last week where they had negative free cash flow for the first time, which meant. they're burning their resources in order to do this AI buildout. That's potentially good for chip making stocks, but also seen as maybe not sustainable in the long run. You know, so people are on edge. People have to remember the expectations are very high. These chip companies and the AI hyperscalers and the different companies, their valuations are extremely high. The stock market, despite the pullback and the NASDAQ, it's still up 8% this year. So there's still a lot of high expectations.

Coming up, Johnson & Johnson makes a new offer to settle years of lawsuits over its talc products, and we'll look at whether any foreign automakers can find their footing in China. Those stories and more after the break. Over 60 years, Medline has demonstrated a track record of delivering consistent growth. Today, Medline is proudly NASDAQ listed and is the largest provider of medical surgical products and supply chain solutions serving all points of care. See how Medline makes healthcare run better at medline.com. The Trump administration is ramping up pressure on the Supreme Court to allow federal agencies to put new restrictions on mail-in ballots and create lists of people deemed eligible to vote ahead of November's midterms. Those changes were outlined in an executive order signed by Trump in March and later enjoined by a federal court. Many election law experts have questioned the order's legality given that the Constitution gives power over voting to states and Congress. At the same time, President Trump is urging Senate Majority Leader John Thune to cancel the upcoming August recess until lawmakers pass a strict proof-of-citizenship voting bill known as the Save America Act. It's fun. I have a good relationship with John Thune. He's just got to get his job done. You've got to get the Save America Act passed. Or better than that would be the filibuster. If you terminate the filibuster, everything happens. John Thune has consistently said that Republicans don't have the votes to pass the bill in the Senate, where they hold a 53 to 47 majority or to alter filibuster rules, which effectively set a 60-vote threshold. Meanwhile, staff for Kentucky Republican Mitch McConnell say that the 84-year-old senator isn't yet ready to leave a rehabilitation facility and return to the Capitol. Mitch McConnell has now been absent for 40 days, fueling continued speculation around his health. If he doesn't return to the Senate this month, Mitch McConnell will likely miss votes on confirming the new Director of National Intelligence and Attorney General, as well as a fight to secure more funding for the Pentagon to pay for the Iran War.

Johnson and Johnson has agreed to pay $5.5 billion to resolve remaining lawsuits that allege that its talc products caused ovarian cancer. It's a bid to end more than a decade of litigation that's hung over the company, damaging its consumer reputation and the value of its shares. Johnson and Johnson said that the agreement, which was reached with firms representing plaintiffs in the outstanding talc cases, is conditioned on 95% of remaining claimants participating. J&J shares are up in off hours trading. Mercedes-Benz is warning of intensifying pressure in China after reporting a 30% drop in its sales there this morning. It's the latest automaker to warn of headwinds in China, which in part led Porsche to slash an additional 5,000 jobs this week. Well, ahead of earnings from Ford this afternoon and BMW later in the week, I asked Journal Auto's reporter Stephen Wilmot, if any foreign brands have found ways to break through in the Chinese market. The outlook is certainly very tough for global auto brands in China. Almost no one is showing growth there. The first companies to really get hit were the mass market brands. Volkswagen in particular, which was a long-time market leader. lost its pole position in the Chinese market to BYD in 2022, 2023. Then at the time, Mercedes and BMW and the luxury brands were still doing pretty well, but now they're really suffering too. And that's kind of what we're seeing in the results this week. You mentioned the Porsche job cuts. It's lost more than half its sales in recent years. There have been extra taxes on luxury cars, but the key effect that the European luxury automakers point to. is real estate, so that the Chinese real estate market's been pretty damp in recent years, and that has led to kind of a wealth effect, which means that people haven't wanted to buy luxury cars in the way they're used to. All right, Stephen, so China looks like it's kind of drying up as an import market for many of these foreign brands. But we should say that even for those like Ford, who have taken a very different approach, treating it as more of an export platform, they're running into headwinds too. Yeah, that's right. And I think the volume brands, so Ford and GM's brands, they saw that their position in China was a bit challenged. So they thought, oh, we've got the factories, we've got relatively good cost positions. Let's use China as an export hub. And so they've both sent some flagship models to the US. But yeah, they're now saying that the next iterations of those products aren't going to be built in China because the political pressure in the US is so against. Chinese cars. You've got this connected vehicle rule, which abands Chinese software in cars. They're talking about making that even tighter. So there's certainly shipping cars from China to the US is not looking like a winning strategy. Other companies, including also Ford and GM, are talking about using China as an export hub for other markets. So the global south is sometimes referred to. Volkswagen is also going down that route saying,

Essentially, it'll build cars in North America for North America, Europe for Europe and China for the rest of the world, because they face increasing pressure from BYD and Chinese automakers in those global markets like South America. So in order to compete with those Chinese automakers, they're saying we need to produce in China too. We can't produce in Europe or the US for global export. That's the one hope for their Chinese businesses that these companies are clinging onto at this point. It's that they can be export hubs for emerging markets for Latin America, for Southeast Asia, the Middle East, where Chinese brands like BID themselves are expanding rapidly. That was Journal European Autos reporter Stephen Wilmot. And it's shaping up to be another huge earnings day with Coca-Cola UPS and Boeing reporting this morning, followed by Visa, snacking giant Mondalise and the aforementioned Ford after the closing bell. And that's it for what's news for this Tuesday morning. Today's show was produced by Hattie Moyer. Our supervising producer was Daniel Bach, and I'm Luke Vargas for the Wall Street Journal. We will be back tonight with a new show. And until then, thanks for listening.