We have seen some significant volatility in certain market sectors this week, with a dramatic sell off in tech and some energy stocks on Monday.
This was a result of the new Chinese DeepSeek AI model appearing to offer comparable performance to western AI applications at a fraction of the price and energy intensity. The latest version of DeepSeek was released last week, and rapidly rose to top spot in app store downloads, with the app seen as competitive with products from Meta and OpenAI. DeepSeek’s open-source model was claimed to have taken only two months and $6 million to develop, by building on existing technology and leveraging existing models. On the latter point, OpenAI cried foul during the week, claiming DeepSeek had harvested data from their own platform.
The market moves on Monday were violent, albeit limited to a small number of stocks. Given the size of some of these stocks – not least Nvidia, which at the start of the week had the largest market capitalisation of any listed company globally – the moves dragged US indices down in particular. Nvidia fell almost 17%, wiping out $593 billion of market capitalisation in a single day. Other chipmakers such as Broadcom, and ASML in Europe, also saw sharp falls. Even more pain was seen in listed US electric power companies, with three of the major firms down more than 20% as their lofty valuations were challenged on the basis that future AI models will be far less energy intensive than previously assumed.
In the space of one market session, DeepSeek has disrupted the AI narrative that has prevailed in markets in terms of reliance on high-end semiconductor chips, extensive computing power, high energy intensity and the need for significant capital expenditure and operating expenses to run AI models. While the open structure and lower energy intensity of DeepSeek may ultimately mean the AI industry is bigger, with a wider positive impact on productivity, in the short term it has unsettled long held assumptions over the ‘winners’ from the AI revolution. In this respect, there are echoes of the tech bubble in 1999-2000 in that the perceived initial winners, such as Intel, Cisco, Nokia, Yahoo! and others, ultimately lost out to new entrants. The Chief Executive of ASML, Christophe Fouquet, said he expected more DeepSeek-style shocks in the coming months or years. ‘You cannot have an industry with this amount of opportunity without the key players being challenged … I don’t think you can define today who is the winner in 2030.’
We have not seen any concrete news on tariffs being imposed by the US, even though President Trump said 1 February would see 25% tariffs imposed on Canada and Mexico. US Treasury Secretary, Scott Bessant, talked up the prospect of starting with a global 2.5% tariff that would increase over time, but Trump said he wanted a ’much bigger’ rate. Trump threatened tariffs on sectors including semiconductors, pharmaceuticals, steel, copper and aluminium, as well as auto imports from China and Mexico. He told US media earlier this week that ‘I have it in my mind what it’s going to be, but I won’t be setting it yet … but it’ll be enough to protect our country’. Yesterday, the president made off-the-cuff comments suggesting the tariffs will proceed, but the lack of firm policy announcements means financial markets are yet to be fully convinced this is not a negotiating ploy.
There has also been plenty of economic data to digest over recent days. The flash PMI data was once again a mixed bag, with persistent weakness in manufacturing offset by service sectors in far better health. The eurozone data surprised positively, with the composite data back in ‘expansion’ territory for the first time since last summer. The UK PMI composite was also ahead of expectations, though the employment and output prices subcomponents suggested the looming national insurance and minimum wage increases are set to cause falls in employment and inflationary pass through to consumer prices. In the US, the services sector weakened but remained positive, while the overall composite remained in positive territory at a level that points to GDP growth at an annualised pace of around 1.5% in Q1 2025. The US and eurozone both published GDP data for the final quarter of 2024. The eurozone failed to grow at all in the final quarter of the year, down from 0.4% in the third quarter and weaker than expected. In the US the data was more encouraging, with a growth rate (on an annualised basis) of 2.3% in Q4, though this was softer than expected and slower than Q3 when the US grew at an annualised pace of 3.1%.
Some of the major central banks met this week, though there were no surprises in terms of outcomes. The European Central Bank cut interest rates by 25 basis points to 2.75% while warning of ‘headwinds’ for the eurozone economy. ECB president, Christine Lagarde, said economic risks were ‘tilted to the downside’ while the ECB statement noted that the fall in inflation was “well on track”, having eased from a peak of 10.6% in 2022 to 2.4% in December 2024. This is the fifth rate cut since last summer, and with the bank saying “monetary policy remains restrictive”, and Lagarde adding “we are not at the neutral rate”, markets continue to price in at least two further rate cuts before the end of the year. In the US, the Federal Reserve kept rates on hold at 4.25%-4.5% as expected. The meeting ended a run of 100 basis points of cuts over the past three meetings. The post-meeting statement was seen as slightly hawkish due to the removal of the previous statement that ‘inflation had made progress towards the committee’s 2% objective’. The Fed also sounded more positive on the labour market, saying “the unemployment rate has stabilised at a low level in recent months, and labour market conditions remain solid”. Fed Chair, Jay Powell, downplayed suggestions that the change in the statement was a hawkish tilt, but said the Fed “do not need to be in a hurry to adjust our policy stance” and would need “real progress on inflation” or a “weak labour market” to cut rates. Powell noted the “committee is very much in the mode of waiting to see what happens” in terms of the new Trump administration’s policies. Powell refused to react to Trump’s calls to cut rates significantly, saying there had been no contact between him and the president since Trump took office, and he was ‘not going to have any response or comment on what the President said’. The Fed is very much in ‘wait and see mode’ and the messaging from the meeting left market pricing on the outlook for Fed cuts over the course of the year little changed, with 44 bps of cuts priced by December – broadly in line with the Fed’s own predictions.
Have a good weekend, enjoy the rugby. I’ve checked on DeepSeek and it’s going with France to beat Wales and Ireland to beat England. Then again it seems to think France versus Wales is taking place in Cardiff …
Source: Columbia Threadneedle Investments as at 31 January 2025.
