Nasdaq futures witnessed a sharp decline (-4 percent) today, spurred by a mix of global developments and investor apprehension. What does this mean for markets?
1. The AI Disruption from China
The primary driver behind the slump in Nasdaq futures is the surprise launch of an advanced, cost-effective AI model by Chinese startup DeepSeek. The new technology has stoked fears about the competitive edge of U.S.-based tech giants, particularly those heavily invested in artificial intelligence, such as Nvidia and Microsoft.
This unexpected move by DeepSeek is seen as a direct challenge to U.S. dominance in AI. Investors fear that the affordability and potential mass adoption of the Chinese model could lead to a recalibration of market share and growth expectations for American companies.
Impact on Stocks:
Semiconductor stocks, which form a significant part of the Nasdaq index, have been hit the hardest. Nvidia, a leader in AI and chip manufacturing, saw its stock fall nearly 11% in premarket trading. Other tech players, such as AMD and Alphabet, also experienced declines, reflecting broader market unease.
2. US-China tech rivalry
The latest AI developments also highlight the intensifying tech rivalry between the US and China. While American tech companies have been dominant in AI innovation, China’s foray into competitive and affordable AI solutions could reshape global markets. This has fuelled broader concerns about geopolitical tensions and their impact on the technology sector.
The US-China competition in AI and technology adds another layer of uncertainty for investors. The ongoing race to secure technological supremacy could lead to increased regulatory scrutiny, trade barriers, or market disruptions.
Now what?
As decibel levels over about DeepSeek and Trump take over, markets seems to be ignoring the upcoming FOMC Meeting, scheduled for January 28-29, 2025. Futures markets are effectively assigning zero chance of another rate reduction on Wednesday. For now, analysts expect the FOMC to adopt a patient approach, as it awaits more details of Trump’s tariff and tax plans.
But there is caution in the air. Higher interest rates could dampen the growth outlook for tech companies, which are particularly sensitive to borrowing costs and valuation metrics. This sentiment is reflected in the market behaviour. In contrast to trends in the recent past when yields rose amid nervousness about potential rate hikes, treasury yields fell sharply today, signalling a flight-to-safety approach by investors. This shift typically signifies that market participants grow wary of riskier assets like equities and prefer the stability of government bonds. As of 7:37 am ET, US 10-year yields were 0.1 percent at 4.52.
What next?
While the Nasdaq’s decline is concerning, analysts believe it could be short-lived. Some argue that the fundamentals of major US tech companies remain strong, and their ability to innovate will help them weather competitive pressures. Others point out that macroeconomic events, such as the Federal Reserve’s upcoming decisions and corporate earnings reports, could well be a turning point for the market, experts say. Global market sentiment, however, remains weak.
Local markets continue to be in correction mode too weighed down by weak global cues and nervousness ahead of Union Budget coming Saturday, February 1.
At close, the Sensex was down 824 points or 1 percent at 75,366, and the Nifty was down 275 points or 1.2 percent at 22,817. About 542 shares advanced, 3,398 shares declined, and 115 shares were unchanged. Nifty plunged below 22,800 for the first time since June 2024.
The carnage wasn't confined to the frontline indices. The broader market took a severe hit, with mid-cap and small-cap indexes plunged 2-4 percent, eroding over Rs 9 lakh crore of investor wealth.
While there is no direct impact of DeepSeek on Indian companies, the broader policy implications will keep markets on tenterhooks for a while, and local market won’t be immune to the volatility.
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