Asian equities declined on Friday, stepping back from record levels as investors secured profits and reduced positions before the Lunar New Year holiday in China. Meanwhile, gold and silver recouped some of their recent losses. Market attention is fixed on upcoming U.S. inflation data, with expectations for a Federal Reserve rate cut now pushed back to July. The impact of AI-related anxieties in U.S. markets on Asia has so far been relatively contained.

The MSCI Asia Pacific Index fell 0.9% on Friday, marking its first decline in six trading sessions, with approximately two-thirds of its constituents finishing lower. Defying the broader trend, South Korea's Kospi index advanced 0.9%, demonstrating resilience following a sell-off in U.S. tech stocks driven by AI concerns. Applied Materials saw its shares surge 13% in after-hours trading, buoyed by an optimistic sales forecast, suggesting potential easing in the cross-asset sell-off.

Gold prices rose 0.7% to surpass $4,950 per ounce, while spot silver extended its intraday gains to 3%, reaching $77.46 per ounce. Bitcoin rebounded after four consecutive days of declines. The yield on the benchmark 10-year U.S. Treasury note edged up 1 basis point to 4.11%, partially retracing gains made during Thursday's risk-off sentiment.

Market focus has shifted to the U.S. January inflation data scheduled for release on Friday. The core Consumer Price Index (CPI) is anticipated to show a year-on-year increase of 2.5%. Traders continue to view a March interest rate cut by the Fed as highly improbable, with a July cut now fully priced in by markets. Benjamin Wiltshire from Citigroup cautioned that markets might be overly optimistic regarding the U.S. inflation outlook, stating, "We are still in a structurally higher inflation environment."

South Korea's Kospi index climbed 0.9%, contrasting with declines in Indian benchmarks, where the Nifty and Sensex indices both fell 1%. Australia's S&P/ASX 200 index closed down 1.4% at 8,917.6 points. The U.S. 10-year Treasury yield increased by 2 basis points to 4.11%. In Japan, 2-year government bond prices erased losses, with the yield turning down by 0.5 basis points to 1.295%. The yen depreciated by 0.3% to 153.21 per U.S. dollar. Gold advanced 0.7% to above $4,950 per ounce, and spot silver's gains widened to 3%, trading at $77.46 per ounce. Bitcoin increased by 0.8% to $66,335.45. West Texas Intermediate crude oil dipped 0.2% to $62.74 per barrel.

Profit-taking ahead of the holiday period dominated trading activity. The MSCI Asia Pacific Index has gained approximately 12% year-to-date. In contrast, the S&P 500 index erased all its yearly gains as of Thursday and is currently down 0.2% for the year. Asian technology stocks have shown particular strength, with the relevant MSCI sector index surging 22%. South Korea's Kospi index, often viewed as a proxy for AI investment, has jumped 32% this year, ranking it among the world's top-performing equity markets.

"Asia has performed well this year, but I am concerned about correlation with global markets and the potential for a tactical pullback," said Nick Ferres, Chief Investment Officer at Vantage Point Asset Management in Singapore.

The yield premium on Asian investment-grade U.S. dollar-denominated bonds widened by about 2 basis points on Friday. According to credit traders, if this move persists, it would mark the largest increase since last October, aligning with a similar trend of widening spreads for comparable U.S. bonds.

The sharp volatility in U.S. markets reflects the high risks associated with the AI boom and its unpredictable ripple effects across sectors, regions, and asset classes, highlighting the emergence of so-called "AI anxiety trades." "Software stocks are now trading like bank stocks in 2008," Nick Ferres remarked, alluding to the global financial crisis.

However, the impact on Asian markets has been relatively limited compared to the AI-induced turbulence witnessed in the U.S. "Nonetheless, as AI applications are expected to progress over time, a scenario similar to the U.S. will likely eventually emerge in Asia as well," said Tomo Kinoshita, a global market strategist at Invesco Japan Asset Management.

Julia Wang from Nomura noted that the market is in uncharted territory regarding AI technology, implying that "there could be plenty of volatility ahead." The robust after-hours performance of Applied Materials suggests that AI-related concerns might be showing early signs of abating.

The U.S. January inflation data stands as the key event for traders on Friday. The core CPI, which excludes food and energy prices, is forecast to rise 2.5% year-over-year. This data has garnered additional significance following Wednesday's employment figures, which indicated a robust U.S. economy, prompting traders to scale back bets on Fed rate cuts. Money markets have subsequently delayed the expected timing of the first rate cut from June to July.

Benjamin Wiltshire of Citigroup suggested that markets are too optimistic about the U.S. inflation outlook, making trades that bet on rising price pressures appear attractive. He pointed out that investors may be underestimating the resilience of the U.S. consumer, and market inflation expectations might need to be revised slightly higher. Traders continue to assign a very low probability to a rate cut at the Fed's March meeting. U.S. Treasuries strengthened on Thursday due to risk-off sentiment in New York markets but gave back some of those gains on Friday.

In the commodities sector, oil prices registered their first back-to-back weekly decline this year, influenced by broader market risk aversion. Gold trading has been volatile since a sudden sell-off on Thursday pushed it below $5,000, with algorithmic traders appearing to amplify the precious metal's downward move.

Adding a positive note for Asian markets, Goldman Sachs Group upgraded its rating on Japanese stocks, anticipating a boost from political stability. Despite this, investors remain cautious in the near term.