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In a week that will be remembered as a pivotal moment for the tech industry, the emergence of DeepSeek, a Chinese artificial intelligence (AI) startup, sent shockwaves through global markets.

The week’s key themes:

  • Nvidia posts the largest single-day loss for any company in Wall Street history
  • US Treasury yield climbs as investors reassess growth expectations
  • Equities a mixed bag across global markets
  • Gold reaches fresh all-time high, while oil drops
  • Pound and euro down against the dollar, while the rand holds steady

DISRUPTING THE DISRUPTORS

DeepSeek’s announcement of a highly efficient AI model that rivals established players at a fraction of the cost, triggered a significant sell-off this week in stocks that directly or indirectly derive revenue from AI and raised questions about the capex spend, which these companies have already invested in AI development and the future recoverability of this spend through fees.

The tech-heavy Nasdaq experienced its most substantial one-day percentage drop since September 2022, plummeting by 3.1%, with Nvidia leading the decline. Nvidia, the poster child of the AI boom, saw its stock price nosedive by 17%, wiping out an astonishing $593 billion in market value – the largest single-day loss for any company in Wall Street’s history. The ripple effects were felt across the tech sector, with other AI-related companies also taking significant hits. Broadcom and Oracle saw their shares tumble by 17% and 14% respectively, while tech giants Microsoft and Alphabet (Google’s parent company) were also not spared, as their stocks declined by 4.2% and 8.4%, respectively.

Energy supply companies also posted notable losses, with Constellation Energy – the largest nuclear plant operator in the United States (US) – seeing its stock price tumble 21%, while independent power producer, Vistra Corp, suffered a decline of 28%, as investors question whether AI will require the huge amounts of computing power and electricity that was once expected.

The tremors, however, weren’t confined to the tech and energy sectors. The broader S&P 500 index fell by 1.5%, highlighting the outsized influence of tech stocks on the overall market. Even international markets felt the impact, with Japan’s SoftBank Group, a major tech investor, seeing its shares slide by 8%. Interestingly, this tech-focused sell-off led to an unusual phenomenon in the S&P 500. Despite the index’s overall decline, more than 300 of its 500 stocks actually rose on the day of the DeepSeek announcement – a first in the index’s nearly 70-year history, suggesting a potential shift in market dynamics, with investors rotating from tech to other sectors.

What makes DeepSeek’s achievement so disruptive?

The company has developed an AI model comparable to industry leaders like ChatGPT, but at a fraction of the cost. While US tech giants have been pouring billions into AI development, DeepSeek reportedly spent just $5.6 million on its model. This cost efficiency challenges the prevailing notion that AI development requires massive investments in computing power and infrastructure. It also raises questions about the sustainability of the high-cost approaches adopted by established tech companies.

The greater question now, is of course, how the DeepSeek disruption could potentially reshape the AI landscape. Some disruptions may include:

  1. Democratisation of AI: Lower development costs could allow smaller companies and startups to compete more effectively in the AI space.
  2. Shift in focus: Tech companies may need to prioritise efficiency and innovation over raw computing power.
  3. Re-evaluation of valuations: Investors may reassess the high valuations of AI-focused companies, particularly those heavily invested in expensive infrastructure.
  4. Global competition: DeepSeek’s success could signal increased competition from emerging tech hubs, challenging the dominance of Silicon Valley.
  5. Reduction in capital expenditure: The cost efficiencies demonstrated by DeepSeek could result in cutbacks in AI infrastructure and hardware spend in the AI space.
  6. Reduction in user-fees: End-users could likely see a reduction in fees, resulting from lower barriers of entry and a reduction in capex spend.

As the dust settles, tech companies face a crucial juncture. They must navigate a landscape where efficiency and innovation are becoming as important as scale and resources. The DeepSeek disruption serves as a shake-up of sorts, challenging long-held assumptions about AI development, but it is not alone in this race. While the immediate market reaction to DeepSeek was dramatic, Alibaba, the well-known Chinese tech giant, also released its new AI model shortly after the release of the DeepSeek model, showcasing a sense of urgency amongst other players in the Chinese AI race.

It is important to remember that innovation often comes in unexpected forms. As we move forward, the tech sector’s ability to adapt to this new paradigm will be crucial. Companies that can balance efficiency with innovation, and scale with agility, are likely to emerge as the leaders. For investors and market watchers, the coming months will be critical. The tech sector’s response to this challenge will not only shape the future of AI but could also redefine the dynamics of the global technology market.

MARKET PULSE

In a week dominated by the DeepSeek disruption, financial markets experienced significant volatility across various asset classes. Here’s how key sectors fared:

Bonds

The 10-year US Treasury yield climbed to 4.55%, up four basis points, as investors reassessed growth expectations in light of the US Federal Reserve’s (Fed’s) decision to hold rates steady. The Fed’s removal of language suggesting progress on combatting inflation, sparked concerns about a potentially longer period of higher rates.

Germany’s 10-year Bund yield rose to 2.55%, leading into the European Central Bank (ECB) interest rate decision. The ECB cut rates by 25 basis points as expected, leading major central banks in monetary policy easing.

The 10-year UK Gilt yield increased to 4.56%, up six basis points, as investors balanced domestic economic concerns with global monetary policy shifts.

The South African 10-year Government bond yield held steady at 10.51%, as the South African Reserve Bank (SARB) also moved to cut interest rates by 25 basis points, as expected.

Equities

The S&P 500 fell 0.47% to 6,066.38, retreating from recent record highs as tech stocks continued to face pressure following the DeepSeek AI disruption. The Nasdaq Composite experienced sharper losses, down 0.8%, reflecting the ongoing tech sector volatility.

The Euro STOXX 50 reached new 24-year highs, gaining 0.6% as investors digested ECB rate cuts and showed optimism about China’s economic recovery.

The FTSE 100 dropped 0.8%, weighed down by losses in energy and banking stocks, with energy giants, Shell and BP, falling 1.1% and 2.3%, respectively.

The JSE All-Share index rose 0.41% to 84,290.99, showing resilience amid global market fluctuations.

Commodities

Gold rallied 1.8% to fresh record highs, breaking the $2,800/ounce mark, as investors sought safe-haven assets amid market turbulence and continued uncertainty.

Crude oil traded around $74.60/barrel, down 0.03%, as concerns over global demand and potential US tariffs offset supply cuts from the expanded Organisation of Petroleum Exporting Countries, OPEC+, and easing geopolitical tensions.

Currencies

The US Dollar Index stabilised around 107.8, showing mixed performance against major currencies as markets digested the Fed’s policy stance and awaited further economic data.

The euro traded at €1.0432/$, down 0.63%, as markets digested the ECB’s rate decision and policy divergence with the Fed.

Meanwhile, the British pound fell to £1.2473/$, down 0.18%, reflecting ongoing United Kingdom (UK) economic woes, coupled with diverging monetary policy expectations between the UK and the US.

Closer to home, the rand traded at R18.47/$, trading largely sideways for the day, following Wednesday’s gains as investors assessed the impact of global economic developments on the emerging market currency.

Key indicators:

USD/ZAR: 18.57
EUR/ZAR: 19.30
GBP/ZAR: 23.08

GOLD: $2,793
BRENT CRUDE: $76

Sources: Bloomberg, Refinitiv and Trading Economics.

Written by Citadel Advisory Partner and Citadel Global Director, Bianca Botes.

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