Chip Stocks Shaken by Both Oil and Interest Rates

📉The Discount Rate Path#

The further out the profits, the more rates bite

A share price is future profit converted into today's value. When rates rise, future profit is discounted more heavily, and stocks whose profits lie far in the future fall the most. Chip stocks carry heavy expectations for profits years away, from data center investment and new process nodes. That is why chip stocks are among the first to wobble when rates rise faster than expected.

It Happened Once in 2022#

Rates up 4.25 points, chip index down 35.83%

In 2022 the Fed raised rates seven times, lifting its target range from 0 to 0.25% to 4.25 to 4.50%. The US 10-year Treasury yield rose from 1.51% at the end of 2021 to 3.88% at the end of 2022. According to Nasdaq data, the Philadelphia Semiconductor Index fell 35.83% that year. Other factors overlapped that year, so the effect of rates alone is hard to isolate.

The 5% Line on the 10-Year#

Crossed intraday on September 14, first in three years

The US 10-year Treasury yield briefly topped 5% intraday on September 14, breaking that line for the first time since October 2023, and closed at 4.996%. The two-year yield, which is sensitive to policy rates, stood at 4.666% and the 30-year at 5.354%. Seoul Economic Daily described 5% as a psychological resistance line that can weigh heavily on stock market sentiment.

🛢️How Oil Spreads to Rates#

Inflation, and the Fed's choice

Oil feeds straight into inflation through gasoline prices and freight costs. When inflation picks up again, the Fed finds it harder to cut rates and, as this year, may weigh a hike instead. Markets price in that possibility early, so Treasury yields jump first. That is why chip stocks take a second hit through the discount rate path on days when oil rises.

Oil Above $100 a Barrel#

A Red Sea strait and a Saudi pipeline

As the war with Iran intensified again, Brent crude rose about 30% in the second half alone to top $100 a barrel. When Yemen's Houthi rebels seized the Bab el-Mandeb strait, WTI jumped 6.69% in a day. Saudi Arabia's East-West Pipeline, which routes around the Strait of Hormuz, also stopped after a drone attack on the 11th, and November Brent settled at $105.68 on the 14th.

US Consumer Prices in August#

Energy up 2.1% in a month

US consumer prices for August, released by the Bureau of Labor Statistics on September 11, rose 0.4% from the previous month and 3.4% from a year earlier. The energy index rose 2.1% in the month, and gasoline, up 3.9%, accounted for over a third of the total increase. Core prices excluding food and energy also rose 0.3% from the previous month, above the 0.2% market forecast.

Will the Fed Pause or Hike?#

The FOMC on September 15 and 16

At its July meeting the Fed held its benchmark rate at 3.50 to 3.75%, but three members dissented in favor of a 0.25 point hike. The minutes note that short-term inflation expectations rose after the Middle East conflict. According to CME FedWatch, on September 14 markets put the odds of a hike at this meeting above 90%. A hike would be the first since July 2023.

⚡The Power a Fab Uses#

How energy prices become costs

Chip fabs run clean rooms and tools around the clock, so they use a lot of electricity. When fuel for power generation spikes, power bills follow with a lag, and someone also has to pay for new grid capacity to serve more fabs. The share of electricity in costs varies by company and process, though, so a rise in oil cannot be turned directly into a matching drop in profit.

Industrial Power Rates Up 75.8%#

From Q1 2022 to Q4 2024

According to the Korea Enterprises Federation, Korea's industrial electricity rate rose 75.8%, from 105.5 won per kWh in the first quarter of 2022 to 185.5 won in the fourth quarter of 2024. Over the same period residential rates rose 37.0% and general rates 31.4%. The more electricity an industry uses, the faster rate hikes turn into cost burdens.

A Proposal to Prepay 25 Trillion Won in Power Bills#

Who pays for the grid?

According to a Seoul Economic Daily editorial, Korea Electric Power Corp. proposed collecting 25 trillion won of electricity charges for the next five years upfront to build the power grid, with 20 trillion won mentioned for Samsung Electronics and 5 trillion won for SK hynix. Both companies said they could not take part, citing the medium- to long-term financial burden. KEPCO's debt stood at 210.7 trillion won at the end of June.

🛒The Money of Chip Buyers#

Household spending and data center investment

Chip demand comes mainly from two places: households buying smartphones and PCs, and Big Tech building data centers. When fuel prices rise, households cut other spending, and when rates rise, the funding cost of data centers built with borrowed money grows. Worry that both kinds of demand could cool at once shakes profit forecasts before any actual orders change.

Data Centers Built on Borrowed Money#

Corporate bond yields follow Treasuries

Big Tech raises part of its data center spending through corporate bonds. According to Reuters, Meta sold $30 billion of bonds last October, and in November Alphabet raised $17.5 billion and Amazon $15 billion. Corporate bond yields are set as a spread over Treasury yields, so when Treasury yields rise, building the same facilities costs more.

Another Blow the Same Day#

Chip index down 5.86% on September 14

On September 14 the Philadelphia Semiconductor Index fell 5.86%. Nvidia dropped 3.36%, Broadcom 4.77% and Micron 5.25%. Oil and rates both rose that day, but Seoul Economic Daily pointed to growing calls within the industry to slow AI development as the main backdrop. A single day's drop cannot be explained by the two variables alone.

💱An Extra Path for Korean Chip Stocks#

The won, bond yields and foreign investors

Korea depends on imported crude, so when oil jumps, worries about inflation and the trade balance lead to a weaker won and higher domestic rates. A weaker won lifts exporters' revenue in won terms, but foreign investors who invest in dollars count currency losses. Korean chip stocks have one more path that US chip stocks do not.

Seoul on September 11#

Samsung Electronics down 3.53%, SK hynix down 2.21%

On September 11 the KOSPI fell 1.76% to close at 6,909.91, giving up the 7,000 level. Samsung Electronics dropped 3.53% and SK hynix 2.21%, while equipment makers such as Wonik IPS (7.15%), Jusung Engineering (5.43%) and PSK (5.60%) fell further. The won weakened by 6.7 won to 1,345.9 per dollar that day.

Three-Year Bonds at 4%#

A line crossed for the first time in two years and 10 months

That same day the yield on Korea's three-year government bonds rose to 4.014%, topping 4% for the first time since November 2023, and the 10-year reached 4.540%. A senior financial industry official warned that even if the Fed merely holds rates, high rates, high inflation and a high exchange rate could all erupt at once. On the 14th the KOSPI fell 3.26% to 6,684.37, its third straight decline.

⚖️Days When Money Flows In Instead#

When profit forecasts hold up

Chip stocks do not always fall when oil and rates rise together. SK Securities found that when both variables climbed from March through May this year, IT hardware and chips in Korea actually strengthened. Its explanation is that the more high oil and high rates dull the appeal of sectors like consumer goods and energy, the more money can gather again in chips, whose profit forecasts remain solid.

The Surge on September 7#

Samsung Electronics up 5.68%, SK hynix up 8.26%

On September 7 Samsung Electronics rose 5.68% and SK hynix 8.26%. Seoul Economic Daily saw it as the combined result of OpenAI's next-generation model announcement, hopes for more data center investment, and prospects for long-term supply deals between Big Tech and memory makers. On the 9th the KOSPI closed at 7,051.64, above 7,000 for the first time in 33 sessions. That week the KOSPI still rose 3.33% from the previous week's close even as oil and rates climbed.