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US stocks were headed for a sharp drop on Monday, led by technology shares, as surging interest in Chinese startup DeepSeek’s low-cost artificial intelligence model raised doubts over the sector’s lofty valuations.
Tumbling global equities prompted a widespread flight to safety, with US government bonds rising and safe-haven currencies - yen and Swiss franc - surging.
DeepSeek, which overtook rival ChatGPT to become the top-rated free application on Apple’s App Store in the United States, says it uses lower-cost chips and less data, challenging a widespread bet in markets that AI will drive demand along a supply chain from chipmakers to data centres.
Futures on the tech-heavy Nasdaq 100 tumbled 3.5 per cent and S&P 500 futures declined 2.1 per cent.
The CBOE Volatility Index (.VIX), opens new tab, known as Wall Street’s “fear gauge”, hit its highest since Dec.20, and was last up 6.3 points at 21.19.
Shares of AI-bellwether Nvidia (NVDA.O), opens new tab, which have risen over 800 per cent since the start of 2023, were down more than 11 per cent in pre-market trade.
In Europe, the technology sector led the pan-European STOXX 600 index (.STOXX), opens new tab 0.4 per cent lower, while the blue-chip Euro STOXX 50 (.STOXX50E), opens new tab dropped 1 per cent.
The STOXX Europe 600 technology index (.SX8P), opens new tab fell 4.4 per cent, its biggest one-day drop since mid-October.
“China and DeepSeek say, at the very least, that they can deliver what ChatGPT can deliver today at a fraction of the cost,” said George Lagarias, investment strategist at Forvis Mazars.
“It makes sense that markets question the narrative that has been underpinning the whole market ... It’s a very frothy market so it doesn’t really take that much for investors to take some profit.”
BROAD RISK-OFF MOOD
The decline in global equity markets has driven risk-averse moves across other asset classes.
The benchmark US 10-year yield dropped 8.5 basis points (bps) to 4.54 per cent, pushing the dollar lower. Safe-haven currencies have been the main beneficiaries.
“Haven demand has spilled over into FX,” said Shaun Osborne, chief FX strategist at Scotiabank.
“Part of the dollar’s slippage can be accounted for by the sharp fall in bond yields,” Osborne added.
The dollar fell 1.2 per cent against the yen and 0.9 per cent against the Swiss franc , two currencies that often gain during periods of market unease.
The dollar index , which measures the US currency against six peers, fell 0.5 per cent to its lowest level since Dec 18.
US import tariffs remain a key theme in markets, with US President Donald Trump so far refraining from implementing broad trade levies.
China, Mexico and Canada are still facing a nervy wait after Trump last week earmarked Feb. 1 for additional tariffs on the country’s top trading partners.
The US dollar rose more than 1 per cent against the Mexican peso but was little changed against its Canadian counterpart and the Chinese yuan in offshore trading .
The dollar also rose 1.2 per cent against the Colombian peso after a short-lived spat with the US over deportations.
On Sunday, Trump threatened Colombia with tariffs and sanctions to punish it for refusing to accept military flights carrying deportees, but Colombia later said it would accept the military aircraft and the US sanctions threat was put on hold.
Monday’s market volatility kicks off a busy week in which both the Federal Reserve and the European Central Bank meet to set interest rates.
In commodities, crude oil futures slipped after Trump called on Friday for the Organization of the Petroleum Exporting Countries (OPEC) to cut oil prices.
Brent crude futures fell 45 cents, or 0.6 per cent, to $78.06 a barrel. US West Texas Intermediate crude was at $74.24, down 42 cents, or 0.6 per cent.
Gold fell 0.5 per cent to $2,755 per ounce.
Leading cryptocurrency bitcoin slumped more than 4 per cent, dropping below $100,000 for the first time in a week, before bouncing to trade at $100,500.