Overview

After a brutal session on Wall Street, where the collapse caused by a questioning of the artificial intelligence boom continued into a second day, Japanese shares led losses in Asian stocks. Big IT companies led the declines, with SoftBank Group Corp. plunging 6% and Advantest Corp. falling as high as 11% in Tokyo. That came after the Nasdaq 100 and S&P 500 fell Monday due to worries that values might be difficult to support due to a low-cost AI model from a Chinese business called DeepSeek. As the Lunar New Year holidays begin, several Asian markets, including those in China and South Korea, will be closed on Tuesday.

Following US President Donald Trump’s announcement that he would soon impose tariffs on foreign-produced semiconductors, medicines, and some metals to force manufacturers to manufacture in the nation, the dollar appreciated against all of its Group-of-10 rivals. The next Treasury Secretary, Scott Bessent, was confirmed. According to the Financial Times, Bessent supported gradual universal taxation.

The DeepSeek Conundrum

Liang Wenfeng, the head of AI-driven quant hedge firm High-Flyer, created DeepSeek in 2023. The business creates AI models that are open-source, allowing the software to be examined and enhanced by the larger developer community. Following its introduction in early January, its mobile app shot to the top of the US iPhone download charts.

Since its January release in the US, an AI-powered chatbot developed by the Chinese startup DeepSeek has rapidly risen to the top of the free app download list on the Apple store. Financial markets have been rocked by the app’s unexpected rise in popularity and DeepSeek’s purportedly low prices when compared to AI firms with headquarters in the US.

Marc Andreessen, a venture capitalist from Silicon Valley, has praised DeepSeek as one of the most remarkable and astounding advances in artificial intelligence. The company claims that at a tenth of the price, its most recent AI models are comparable to industry-leading models in the US, such as ChatGPT. The app’s developers claim that it only cost $6 million (£4.8 million) to develop, a significant reduction from the billions of dollars that US AI companies have spent.

AI Fall to continue?

Matthew Haupt, a portfolio manager at Wilson Asset Management, stated that while it is too soon to predict the future effects of DeepSeek, it has shown that the industries that could be affected are crowded. He also stated that the prospects for a selloff have changed because the concerns around growth outlooks are no longer entirely predetermined.

The market narrative that has dominated since Donald Trump’s reelection in November —America-first, tech-fueled bullishness that saw a clear upward path for risk assets pushed by deregulation, tax cuts, and even government support of AI investment—was further shattered by Monday’s AI fall.

Following Monday’s selloff, US equity futures saw minimal movement in the early hours of Tuesday. With the 10-year yield up one basis point to 4.55% after dropping nine basis points on Monday, treasuries marginally declined in Asia. The gains from Monday were maintained by a 0.3% increase in the Bloomberg Dollar Spot Index. Taiwan and Vietnam are among the other Asian markets that close for the Lunar New Year vacations. Singaporean and Hong Kong bourses are scheduled to close early.

In New York, Nvidia Corp., the face of the AI revolution, fell 17%, losing $589 billion in market value—the highest ever for a single stock. Despite recent efforts to reduce their power, the group of companies that make up roughly 40% of the Nasdaq 100 include Nvidia, Apple Inc., Microsoft Corp., Amazon.com Inc., Meta Platforms Inc., and Alphabet Inc. In the S&P 500, it is almost 30%.

Chinese Lunar New Year

As Chinese investors begin their Lunar New Year holidays, which will end on Tuesday, they have a lot to think about. The country’s economy unexpectedly slowed down at the beginning of the year, halting the momentum of a rebound spurred by stimulus plans and highlighting Beijing’s need to take more action to avoid another recession. In an effort to boost trust in the so-called Magnificent Seven group of firms, traders around the world will be focusing on this week’s earnings releases from companies like Apple and Microsoft.

With company shares close to all-time highs and their valuations stretched, investors are about to enter another crucial Big Tech earnings cycle. This time, there’s a crucial difference: the group’s earnings growth is anticipated to be the slowest in over two years.

DeepSeek hitting American companies hard

DeepSeek sets itself apart from other chatbots, such as OpenAI’s ChatGPT, by explaining its logic before responding to a prompt. According to the business, its R1 release provides performance comparable to OpenAI’s most recent, and it has issued licenses to anyone who wants to build chatbots with the technology.

According to reports, DeepSeek was created for hundreds of millions of dollars less than its US competitors, which raises concerns about America’s continued dominance in AI. On January 27, financial markets were rocked by the company’s allegedly reduced costs, which caused the tech-heavy Nasdaq to plummet more than 3% in a global sell-off that included data centers and chip manufacturers.

The US-based Nvidia, which produces the potent chips that underpin AI, seems to have been the most severely affected. As its stock price fell 17% over the day, it lost around $600 billion in market value on Monday, the worst one-day decline for any firm in US history. According to Forbes, Nvidia’s market worth dropped from $3.5 trillion to $2.9 trillion on Monday, dropping it to third place behind Apple and Microsoft, the most valuable business in the world by market capitalization. Compared to Nvidia’s semiconductor chips, DeepSeek employs less sophisticated ones.

Their achievement challenges the notion that the only means to advance AI are with larger budgets and top-tier CPUs, a notion that has greatly raised doubts about the necessity and prospects of high-performance computers.