Tech tumbles and Nvidia crashes on global AI panic

• Nasdaq falls 2.97%, S&P 500 slides but Dow gains on haven plays
• Giant chipmaker Nvidia loses 16.8%, wiping out $600bn from its market cap
• Yen and Swiss franc jump as DeepSeek concerns drain risk appetite
• Gold drops as investors liquidate positions in equities

FX: USD was in the red for a third straight day, after suffering its worst weekly fall since November 2023. We are on track for the first monthly dollar decline since September last year. FX got caught up in the DeepSeek volatility, but traders preferred JPY and CHF to USD as a safe haven play. The widely watched 10-year US Treasury yield fell to a one-month low of 4.56% as investors rushed into safety and government bonds.

EUR traded more or less flat on the day after getting up to a high of 1.0532 just before the US open. Eurozone/US two-year yields spreads (they typically map most closely where interest rates are going) have narrowed to the tightest levels since early November. The German IFO business survey modestly improved in January. But the best leading indicator for Europe’s biggest economy remain in stagnation with more downside than upside risks in the near term.

GBP closed marginally higher on the day. There’s not a lot on the UK data calendar this week so cable will move on the broader dollar and risk tone. A weekly ‘morning star’ candlestick pattern is bullish and comes after the major broke higher out of the long-term bear channel last week. BoE Governor speaks on Wednesday.

USD/JPY fell sharply as the risk off mood took hold of wider markets. The yen was the outperformer on the day, beating the swissie to top spot on haven demand. Last week’s bullish BoJ meeting and inflation forecasts also likely helped. Many economists expect two more rate hikes this year, in July and October. But much depends on the Trump tariff threat. The next major level below is at 153.40 – that is the Fib retracement (61.8%) marker of the summer drop.

AUD sold off on weak risk sentiment. CPI data is released on Wednesday and could be the deciding factor in a first RBA rate cut of the cycle. USD/CAD remained in its recent 1.43-1.45 range, give or take. February 1^st hangs over Canada with possible US tariffs commencing. The BoC is expected to cut rates again on Wednesday, a few hours before the FOMC meeting.

US stocks: The benchmark S&P 500 closed in the red, down 1.46% at 6,012. The tech-laden Nasdaq settled lower, off 2.97% at 21,127. The Dow Jones outperformed, finishing up 0.65% at 44,713. The AI rout was sparked by investors worried over the impact of Chinese artificial intelligence model, DeepSeek. It is open source and is said to have been developed at a fraction of the cost of OpenAI and other US models, with cheaper chips and less data. Nvidia, the biggest stock on the planet by market cap on Friday, plunged 17%. The index of semiconductor stocks suffered its worst single day decline since the onset of the pandemic in March 2020. Alphabet, Google’s parent, Tesla and Microsoft all got sold, with losses of between 2.14% and 4.03%. Notably, Apple closed higher by over 3% as it was seen as a value play after its recent losses. Tesla, Microsoft and Meta report their latest earnings on Wednesday after the US close, with Apple results at the same time on Thursday. On the flip side, selling was chiefly in AI plays as almost 70% of the S&P 500’s stocks ended higher. Consumer staples like Johnson & Johnson and Coca-Cola posted decent gains.

Asian stocks: Futures are in the red. Indices were mixed with thin liquidity due to one-day holidays in Australia, south Korea and Taiwan. This comes ahead of mainland China’s week-long holiday starting today. The Nikkei 225 slid back below 40,000 as the choppy price action continues amid tariffs and a hawkish BoJ. China stayed in the green ahead of the mainland holiday for Chinese New Year. Manufacturing PMI slipped into contractionary territory.

Gold gave back of its recent rally after four weeks of strong gains pushed it close to the record high. A pause seems fairly logical after the solid bullish breakout in the middle of the month.

Day Ahead – DeepSeek impact: A Black Swan event?

One prominent venture capitalist called the new Chinese model, “AI’s Sputnik moment”. That refers to the Soviet Union stunning the US at the time by putting the first satellite into orbit. Markets didn’t need a second invitation and reacted sharply to the DeepSeek shock. It gives rise to numerous questions. Firstly, US exceptionalism and leadership in AI may no longer exist. Secondly, is there really a need for trillions worth of investment in AI capital expenditure? Finally, many are wondering aloud about the perceived ‘moat’ of certain US tech companies, now that a Chinese company has built a LLM on the cheap.

Certainly, there were some dramatic market moves, both in stocks and also in the wider macro space with US yields and USDJPY staging notable moves. Is this a new long-term theme or an opportunity to buy the dip? Obviously, narratives can change very quickly in markets, especially when consensus is very uniform. The FOMC meeting is also now in view, with expectations of an extended policy pause. But a period of volatility might put in play a modestly more dovish Fed. The March meeting currently has around 40% chance of a 25bps rate cut. Before Monday, that probability was put at roughly 28%. The dollar also succumbed to selling and if stocks continue to go lower, a position squeeze with margin calls may force profit taking in winning trades – and long USD would be an obvious candidate.

Chart of the Day – Nvidia tumbles through 200-day SMA

The dominance of the so-called ‘Magnificent 7’ that includes Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla has dominated markets. For some time now, index buyers have really been buying the seven best performing stocks that comprise over one-third of the S&P’s market capitalization and especially the three highest weighted stocks (Apple, Microsoft, Nvidia) that account for about one-fifth of the index.

Even before yesterday’s AI rout, the tech sector was the second worst performing sector year to date as there were increasing signs of fatigue in this trade. If investors suddenly realise that the premium on US tech growth, or more specifically the Mag 7, is unjustifiably high, there could be more significant room for downward adjustment. It’s notable that the group was trading at a 100% premium to the S&P 500 equal weight. For those with long memory, this hasn’t always been the case. 15 years ago, it was the other way around, with the equal weight S&P 500 trading at a 10% premium to the cap-weighted index. 

Regarding Nvidia specifically, it has benefitted from Silicon Valley’s race to build ever larger clusters of chips. Has this frenzy now come to an end? The breakdown out of the recent $130-150 range looks bearish. Prices have fallen through the 200-day SMA at $121.76 and the 50% level of the August swing low to record high in November.  The next Fib is at $114.45. That’s 25% off its all-time top.

AUTHOR

Jamie Dutta >

Jamie Dutta is a Market Analyst for Vantage. He comes with extensive experience as a full-time trader and financial market commentator, having worked as a trader in top tier investment banks and trading houses.