Bassanese Bites: DeepSeek DeepConcern – January 28 2025

Global markets

Updated for last night’s close, US stocks were up modestly over the past week helped by relief on the trade-war front. However, US stocks fell on Friday and more so overnight due to a major new threat to the prevailing AI narrative. 

2025 has started with a bang. First the good news: markets enjoyed early relief last week with US President Trump refraining from imposing new tariffs on major trading partners in his first days in office. That said, he’s still swinging the tariff stick on a daily basis, leaving markets guessing.

The bad news (at least for those stocks enjoying the current AI narrative) was the release of incredibly impressive results from China’s AI start-up DeepSeek, which has quickly become a deep concern to Silicon Valley. In short, DeepSeek claims it can deliver similar AI performance to ChatGPT and Gemini with less expensive chips and less power use – what’s more, it’s free!

If so, the premium attached to Nvidia’s best chips is immediately in question, as is the ability of Alphabet and Microsoft to monetise their AI offerings, not to mention the reduced value of energy companies as the likely power demands of AI are re-assessed. Talk about tech disruption!

Of course, what is bad news for existing AI producers potentially is good news for budding AI users and application developers – in much the same way, perhaps, as the skills associated with building and maintaining websites in the late 1990s tech boom were quickly commoditised. Although the premium attached to the value of many early internet companies quickly evaporated, it did not stop the ongoing internet boom and ensuing digital revolution. As with the internet, ever-cheaper AI technology is also deflationary.    

From an immediate market perspective, however, the problem is many of the current winners of the AI boom appear at most risk of disruption, and most of the future winners either aren’t yet listed or are still too hard to identify (although Meta, Apple and Salesforce, as major AI users, have so far seen market gains). In any case, the continued outperformance of the technology sector, and even the US market, is clearly in question.

Provided the macroeconomic backdrop remains good, however, it need not spell the end of the equity bull market but rather a rotation both within technology and towards non-technology. If this really is the end of US exceptionalism and cheaper technology it could also help drag down the US dollar and bond yields.

In other global news last week, the Bank of Japan raised rates, as widely expected – though unlike the surprise move in August last year, it barely caused a ripple in markets.   

Global week ahead

While markets are likely to continue to mull the implications of the DeepSeek shockwave this week, there’s also a host of other key events.

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