The coal-powered Asian AI engine driving Wall Street’s record run

For a while, stock trading in Asia appeared to be unstoppable and has grown to be one of the largest sources of income for American banks.

Then, practically overnight, the atmosphere was altered by a Chinese artificial intelligence business.

Asian equity markets have been bringing in large sums of money for Wall Street’s main banks, and the area is getting closer to becoming Europe’s second-largest source of trading income behind the US.

Large institutional clients have invested heavily in Asian companies involved in the supply chain for AI chips over the past year, including China’s Cambricon Technologies, Taiwan’s TSMC, and South Korea’s SK Hynix.

The figures are startling. Asia continued to be identified as a major contributor to the largest investment banks’ record-breaking $25.7 billion in revenue from equity trading in the most recent quarter.

Clients wanted a piece of everything related to AI in Asia, not just in the US, according to Denis Manelski, co-president of global markets at Bank of America.

“We saw strong demand for financing, cash and derivatives in Asia,” he stated.

Coal fills the gap as power demand surges

However, a lot of electricity is needed to keep that machine operating. Data centers don’t sleep. They require power constantly, and Asia has a plentiful supply of coal that can provide it.

Nearly three-fifths of the world’s known coal deposits are located in this region. It is less vulnerable to disruptions from foreign conflicts, less expensive than importing gas or oil, and has emerged as the preferred fuel for the region’s data center expansion despite its well-known environmental harm.

The issue is straightforward, according to Alexander Kheder, a market researcher at BMI who monitors global investment in AI infrastructure.

“AI demand is materialising faster than clean energy generation can be commissioned,” he stated.

Despite significant advancements, solar and wind power are still unable to consistently provide the steady supply of electricity needed by AI data centers.

Cyberjaya, a technology hotspot in Malaysia, currently has dozens of data centers, and more are on the way.

Adit Rahim, a 49-year-old communications professional from the area, is uneasy about the expansion. He stated, “The impact is going to be very, very visible,” highlighting the strain that this development is placing on nearby utilities.

A Chinese startup spooks the markets

Then the shock arrived.

A new model named Kimi K3 was unveiled by the Chinese startup Moonshot AI, which described it as an open-source system that nearly matches the performance of top Western AI products like ChatGPT from OpenAI and Claude from Anthropic.

The subscription business models developed by US AI businesses are immediately threatened by open-source models, which are free for everyone to use and modify.

Businesses may spend less on paid services and the chips that power them if they can obtain similar outcomes for free.

The markets reacted quickly. On Friday, the Nasdaq dropped 1.4%. The S&P 500 fell 1%. The Dow ended the day down 407 points, or 0.77%.

Japan’s market ended the day down 4%, while Taiwan’s primary stock index fell more than 6%.

After falling 1.6% on Friday alone, an index that tracks semiconductor chip companies is now 20% below a record high it reached in late June, firmly placing it in bear market territory.

Senior bank executives expressed their worries openly. The global co-head of equities at Goldman Sachs, Dmitri Potishko, pointedly questioned what would happen if the AI trade reversed or if all quantitative funds began selling at once.

“There are correlated risks that drive exposure in prime books,” he stated.

The chairman of the Wells Fargo Investment Institute’s global equities and real assets division, Sameer Samana, stated that his team was already concerned that technology stocks, especially those of chipmakers, had risen too rapidly.

In an email, he stated, “Really, markets were just looking for any excuse to sell.”

Asia’s AI gold rush is far from over. However, for the first time in months, those in charge of the funds are openly questioning what would happen if the tide turned.

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