Current Setup
The Taiwan Index (TAIEX) pulled back slightly on Friday after hitting the psychologically important 50,000 level. Despite the modest pullback, the index remains in an exceptionally strong uptrend following year-to-date gains of 72%. This strong move to record highs has been backed mainly by the AI/semiconductor cycle, with 40% of the total market value of the Taiwan Index being contributed by the Taiwan Semiconductor Company (TSMC).
The ajor headwind to this move comes from the rise in US bond yields, and the continued geopolitical risk from the Middle East conflict, both of which could lead to more extensive profit-taking and send stocks on the Taiwan Index lower.
Taiwan Index: Current Macro Drivers
1. TSMC’s Exceptional Revenue Growth
The strong AI cycle has benefitted Taiwan’s semiconductor market, represented on the TAIEX by TSMC as the flagship equity in this sector. The company’s exceptional revenue growth remains the biggest story on the TAIEX and its main fundamental driver. Preliminary earnings for the third quarter show that TSMC pulled in record-breaking Q3 revenue of NT$1.49 trillion, a 50% YoY growth which beat the market’s NT$1.46 trillion consensus number. Revenue grew 54.6% in September alone, fueled by the continued AI-related semiconductor demand. Full 3rd quarter earnings are due on 15 October.
2. AI Demand
The current high global demand for AI products and the epansion of capex by the leading AI companies means that TSMC’s exposure to Nvidia, Apple and the broader AI infrastructure ecosystem puts the Taiwan index squarely at the forefront of the AI investment cycle. TSMC’s move to a record NT$2,575 share price enabled a 600-point contribution to the TAIEX’s upside move.
3. US Treasury Yields
Technology-heavy markets are susceptible to a rise in US bond yields, as this elevation increases the discount rate applied to tech companies such as those in the semiconductor sector. This renders the TAIEX vulnerable to profit-taking if US bond yields remain elevated, irrespective of positive AI fundamentals.
Taiwan Index Forecast Scenarios
Bullish→Upside break above 50,000: This gives the bulls a chance to make a run for the upside target at the 27% Fibonacci retracement above 52,600. This would be a new record high and sustain the current bullish trend.
Base case→ TAIEX consolidates between 47745 and 50,000: The current rejection move at 50,00 could keep the index range-bound until a bullish/bearish trigger emerges to determine the next direction. Strong TSMC fundamentals will continue to exert enough pressure to limit the downside, while elevated global bond yields limit the upside.
Bear case→ TAIEX breaks below 47745: A breakdown of this support makes room for a deeper retracement, targeting 45550 and potentially, lower targets. Rising US Treasury yields that continue to pressurize global tech stocks will be the main trigger.
Technical Outlook
The 50,000 psychological level is now the key upside barrier. The bounce from the 50% Fibonacci retracement level of the 13 March to 21 June upswing has cleared several resistance levels, the latest being the 47745 resistance. A slight pullback and bounce off this point make it the immediate support the bulls must defend for the price to test new all-time highs at 52,677 (27% Fibonacci extension). This will also require clearance of the 50,000 psychological level.
Conversely, a breakdown of the 47745 support points to a return first to 46,000 (psychological support), then to 45520 (16 September low), 44320 (19 August low), and the 23.6% Fibonacci retracement level as additional downside targets. Only a breakdown below 39960, which holds the 29 July low, will jeopardize the current bullish structure. Failing to reclaim it could trigger deeper profit-taking.