Stocks drop as US-Iran peace talks stall, AI rally cools

LONDON - Shares slid on Friday as investors turned defensive ahead of the weekend, wary of the flare-up in Middle East hostilities with US-Iran peace talks in limbo.

The Iran-backed Hezbollah militia rejected a new ceasefire in Lebanon on Thursday and Israel said it would not withdraw troops from the country, undermining US President Donald Trump's efforts to halt fighting there and reach a peace deal with Tehran.

Meanwhile, an AI-driven selloff after chipmaker Broadcom reported underwhelming results on Wednesday continued into a second day, as investors took profits following a blistering recent rally.

The pan-European STOXX 600 index slipped 0.2%, led by declines in tech stocks .SX8P which have risen 33% in the past two months, the most among sectors in the broader index.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 2.23% in Asian trade, with South Korea's tech-heavy Kospi plunging as much as 7%.

"(It) seems like quite a risk-off today," said Charu Chanana, chief investment strategist at Saxo.

"Korea has been one of the biggest beneficiaries of the AI memory supercycle, so when Broadcom disappointed on AI expectations, investors quickly de-risked the whole semiconductor chain," she said.

"The issue is not that AI demand has disappeared - it is that expectations had become extremely high, and even good numbers are no longer enough unless guidance keeps moving higher."

Nasdaq futures fell 1.2% and S&P 500 futures ESc1 eased 0.6%, after a mixed session on Wall Street overnight.

Cryptocurrencies extended recent declines, with bitcoin shedding 1.4% to USD 62,725.54 and heading for a weekly decline of 15%, its biggest since the week FTX collapsed in November 2022, while ether was down 2.3% at USD 1,732.09.

OIL SET FOR WEEKLY GAIN

Oil prices eased slightly after Oman said operations at Mina al Fahal port were proceeding normally following an earlier Reuters report that oil loadings had been suspended after an explosion.

Brent crude futures fell 24 cents to USD 94.79 a barrel and US crude edged down 0.6% to USD 92.48 per barrel, with both contracts set to post their first weekly gain in three weeks.

Kristian Kerr, head of macro strategy at LPL Financial, said markets were underestimating the complexities involved in restoring shipping through the Strait of Hormuz to pre-war levels, even if Washington and Tehran reach a memorandum of understanding.

"Any early increase in barrels is likely to come from already produced crude, including crude sitting on stranded or floating vessels and Iranian cargoes in storage, rather than a sustained restart in production or exports," he said.

"In other words, this is more about clearing existing bottlenecks than reflating the supply base."

EYES ON US NONFARM PAYROLLS

In currencies, the dollar was on track for a 0.5% weekly rise supported by the Middle East conflict.

The yen languished near the 160 per dollar level and was last 0.1% stronger at 159.95, as Japanese officials ramped up warnings on the ailing currency, keeping traders on alert for further intervention from Tokyo.

Data on Friday showed Japan's foreign reserves fell by USD 77 billion in May.

Focus now turns to the closely watched US nonfarm payrolls data due later in the day.

Market forecasts are for a solid rise of 85,000 in employment, keeping the jobless rate steady at 4.3%. Anything stronger would likely see the odds of a Federal Reserve rate hike narrow further.

(Reporting by Lawrence White and Rae Wee; Editing by Kate Mayberry)