Japan's Nikkei slumped 6 percent, its deepest one-day drop since April 2025. Benchmark share price indices in South Korea and Taiwan similarly plunged more than 8 percent after the opening bell, before cutting losses as authorities scrambled to stem the selling.

Wall Street's volatility "fear gauge" soared, the Nasdaq sank 5.5 percent and US$3 trillion was wiped off S&P 500 firms, with investors worried Democrats, who dominated midterm elections this week, will apply brakes to the AI boom.

"It's actually a bit of a disaster," said Christopher Forbes, head of Asia and Middle East at CMC Markets.

"[Clients] were long index, long stocks, and they all got carried out," he said. "All night, all day – we had client margin calls, client complaints [...] because it's a very emotional thing, right? People are wedded to their positions and views on a stock or outcome and you're telling them, look, you've just lost money."

The political jitters are hitting an AI trade already on shaky footing due to worry about return on massive spending in AI-related infrastructure, with the meltdown spurring margin calls and spooking retail investors and hedge funds alike.

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"The selloff shows that AI stock prices had been built on rosy illusions about the future, and now that illusion is gone," said Dong Baozhen, chairman of asset manager Lingtong Shengtai.

"The US stock market has been the standard-bearer and backbone of the global AI bull run. Now that backbone has snapped. Can AI bull markets elsewhere hold up on their own?"

Authorities attempt to soothe nerves

By the Asian afternoon, stocks cut some losses as authorities worked to soothe nerves, with South Korean Finance Minister Lee Hyoung-il temporarily easing rules on retail investors' leveraged investments.

Multiple people told Reuters the Ministry of Finance in Taiwan called senior executives at state-owned banks in the morning and instructed them to support the market.

Taiwan stocks closed down 4.5 percent, recovering somewhat from their early morning slump. For the week, the index clocked a 12.2 percent decline, its biggest since 1991, LSEG data showed.

Nasdaq futures were up 0.8 percent while European stock futures were last down 1 percent, indicating sentiment remained fragile.

Korean AI chipmakers Samsung Electronics and SK Hynix fell nearly 6 percent and 9.4 percent respectively, cutting steep losses from earlier. TSMC fell as much 8.5 percent in Taiwan, before closing down 4.7 percent.

In Japan, Kioxia plunged 11 percent while AI investor SoftBank Group slid 11 percent, with the cost of insuring against the Japanese firm defaulting on debt jumped to its highest in four years.

"After damage like the sort we've been facing, it is difficult to think that we simply can bounce from here," said Steve Sosnick, chief strategist at Interactive Brokers.

"We may be oversold in the short term, but the underlying questions and causes can't simply be wiped away."

Sentiment shifts, cracks emerge

Investor fear also centered on whether a stalling AI infrastructure expansion could hurt smaller firms whose capacity to raise funds has already been limited by higher interest rates and tighter financial conditions.

AI cloud computing provider CoreWeave, which has become a barometer of investor anxiety over heavy AI spending and borrowing, slumped 10 percent, while its 5-year credit default swap spreads widened to a record level.

The selling indicates investors are starting to factor in increased local opposition to data centers, with analysts saying markets have yet to fully consider the cost such building has imposed on communities.

Texas Governor-elect Gina Hinojosa on Thursday said the state will introduce laws to protect residents with regards to data centres, citing their impact on rural communities.

Still, some analysts said the selloff was overdone and the bottom was not far off.

"Today we are bound to see further liquidation of margin accounts, which suggests we are likely in the final stage of capitulation," said Allen Huang, a vice president of Mega Financial Holding's equities trading department.

"Even TSMC hit its daily limit down circuit breaker at one point, which typically marks the tail end of a downturn. When TSMC gets sold off, that means all stocks have been thoroughly dumped," Huang said.

Finding refuge in bonds

Bonds gained in Asia, with US Treasuries as well as government bonds in Japan and China rising. The US dollar lured haven flows as did the Japanese yen and Swiss franc.

The yield on the benchmark US 10-year Treasury note was at 4.838 percent, hovering near the lowest level since September 9. The 10-year JGB yield dropped as much as 9 bps to 1.795 percent, the lowest since June 30.

"Bonds are increasingly behaving like bonds again, with income re-emerging as the primary driver of returns and restoring their traditional diversification benefits," said Masahiko Loo, chief fixed income strategist at State Street Investment Management.

"This looks more like a reassessment of AI policy risk than a reassessment of the AI cycle."

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