(Bloomberg) -- Japan’s Nikkei 225 Stock Average had its biggest weekly drop since June 2022 amid a global selloff in stocks as the outlook for US interest rates and tensions in the Middle East spooked investors.

The gauge declined 2.7%, paring earlier losses, when it looked to be on course of a technical correction, falling 10% below its all-time high. The index is now less than 1% away from the level. 

The broader Topix Index fell 1.9%. Semiconductor companies including Tokyo Electron Ltd. were among the biggest decliners, with the tech sector under extra pressure after Taiwan Semiconductor Manufacturing Co. scaled back its outlook for chip-market expansion.

The change of fortunes for the Nikkei has been swift. The blue-chip gauge had reclaimed its historic 1989 high just two months ago and set a fresh record on March 22. 

Japanese stocks, along with their global peers, have been ravaged recently as traders slashed bets on rate cuts by the Federal Reserve this year following a series of hawkish comments from officials and data that indicates a robust US economy. Geopolitical tensions in the Middle East have also reverberated through markets, raising risks for global trade and increasing the likelihood of higher energy costs.

“It’s a triple whammy of sorts — Fed’s hawkishness continues to take a leg up with each passing day, and semiconductor earnings have so far proved insufficient to counter the risk-off,” said Charu Chanana, a strategist at Saxo Capital Markets Pte. “Meanwhile, escalation in geopolitical concerns is also mudding the outlook.”

Chip companies including Screen Holdings Co. and Lasertec Corp. led decliners on the Nikkei. TSMC cautioned that the smartphone and personal-computing markets remain weak.

Israel launched a retaliatory strike on Iran less than a week after Tehran’s rocket and drone barrage, according to two US officials, but Iranian media appeared to downplay the incident in the hours that followed the initial reports.

New York Fed President John Williams said while it’s “not” his baseline expectation to hike interest rates, it’s possible — if warranted. His Atlanta counterpart Raphael Bostic said he doesn’t think it will be appropriate to ease until toward the end of 2024. The Fed may “potentially” hold rates steady all year, Minneapolis Fed chief Neel Kashkari told Fox News Channel.

“Today’s move is a part of global risk-off triggered by the rising tension in the Middle East,” said Naka Matsuzawa, chief strategist at Nomura Securities. “This is not a time for buying stocks on valuation. It’s perhaps difficult to take a buy-on-dip stance for the Nikkei until we can be confident that the Fed’s next move is indeed a rate cut.”

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