DeepSeek-ing A Haven, While AI-ing A Buying Opportunity

WHERE WE STAND – A couple of things to address, this morning, from yesterday’s risk-averse start to the week.

Firstly, AI, where every man & his dog seems to have got incredibly over-excitable about something called ‘DeepSeek’ over the last couple of days. Now, I’m by no means an AI expert, I struggle to turn my computer on most mornings, but the nub of the issue here seems to be that the firm has created a model which seems to be on a par with those created by the likes of OpenAI, for a considerably lower ‘training cost’.

This, in turn, appears to have cast some doubt on whether the elevated multiples at which firms like Nvidia currently trade are valid, given their basis in a continuation of the huge AI-related CapEx that we have seen over the last couple of years. Were this CapEx to slow, as the cost of training models falls, that could subsequently threaten the rally seen in this sector over the same period.

I’d make three comments here. One, cheaper AI-related costs could actually be a boon for the sector, if it were to democratise and broaden the industry. Two, the ‘DeepSeek’ data has come from China, hence a large pinch of salt is naturally required. Three, western governments are currently seeking to ban an app where folk do silly dances for fear of Chinese interference and espionage, if you think they will let this one fly, then I have a large bridge to sell you.

Moving on, tariffs were also on the mind yesterday. After Colombia, on Sunday, denied permission for two US planes carrying deported migrants to land in the nation, President Trump imposed “emergency” 25% tariffs on the nation, along with various other sanctions. Nine hours later, Colombia had backed down, agreed to the US’ terms, and allowed the planes to land.

Here we have, as a helpful reminder, evidence of how President Trump views tariffs. They are a negotiating tool. They are a big stick with which to beat other nations. They are a way to bring people to the negotiating table. And, ultimately, a method for Trump to get his own way,

Of course, none of that is new, or particularly ground-breaking, but is useful context as tariff rhetoric remains likely to ramp-up in the near future, especially ahead of the rumoured 1^st February date for tariffs to be imposed on Canada and Mexico. Furthermore, participants did seem to have read rather too much into the lack of ‘day 1’ tariffs last week, assuming that that meant no tariffs whatsoever, so those headlines will have been a bit of a reality check, and likely seen some tariff-related hedges put back on as well.

In any case, those two catalysts combined to create a pretty brutal day in the equity space, with focus falling largely on the former. Though equities ended well off intraday lows, the S&P still ended the day 1.5% lower, while the tech-heavy Nasdaq 100 shed 3.0%, the biggest one-day decline since 18^th December – no surprise that the Nasdaq underperformed, with the tech sector not only most exposed to potential negative AI developments, but also the area of the market where longs were probably most stretched. As if to epitomise this, Nvidia ended the day 17% lower, erasing almost $600bln in value, the biggest one-day market cap drop in history.

From a broader standpoint, this is the type of violent reaction that can happen when positioning is very uniform, sentiment very one-sided, and a market that is priced to perfection receives some sort of a negative catalyst. Momentum, remember, can and does work both ways!

Despite the declines yesterday, I remain an equity bull, and would view this as a dip to be bought, amid continued strong economic growth, and solid earnings growth to boot. That said, understandably, conviction to ‘catch a falling knife’ might be a little lacking for the time being, as uncertainties emanating from the Oval Office persist, and ahead of this week’s FOMC decision, as well as earnings from four of the ‘Magnificent Seven’.

Outside of the equity space, haven demand was also evident, with long-end Treasuries rallying as much as 10bp on the day, while the JPY and CHF found solid demand as well. Interestingly, the USD traded a chunk softer, as the DXY briefly dipped beneath the 107 figure, perhaps suggesting a degree of cross-border equity outflows. Gold also backed away from setting a fresh record high, losing around 1% on the day, pointing to a further unwind of popular momentum trades.

Anyway, there was at least one person that yesterday’s sell-off in equities was good for – Chancellor Rachel Reeves. 10-year Gilt yields hit year-to-date lows on Monday, at 4.55%, though clearly the fiscal backdrop remains perilous, and participants will listen with interest to a(nother) ‘plan for growth’ in her speech on Wednesday.

LOOK AHEAD – While participants will, today, pay close attention to the fallout from yesterday’s risk-off moves, there are a couple of calendar items of note.

From the US, today sees the release of the latest durable goods orders figures, along with January’s consumer confidence survey, and the Richmond Fed’s manufacturing index, which will help to shape expectations for the ISM manufacturing figure next week. 7-year supply is also due stateside today, as auctions are front-loaded ahead of tomorrow’s FOMC decision.

Meanwhile, the earnings docket is relatively busy, with releases today including Boeing, GM, Starbucks, and SAP, with the latter being the largest stock by weight in the DAX.