S&P 500 E-mini futures are down nearly 2% in early morning trading today, erasing last week’s gains. Nasdaq 100 futures are down more than 3% and Dow Jones is down nearly 1%.
We don’t typically see this much market action in graveyard shift trading for the United States, and seeing it indicates that something is happening that could change the prevailing trend.
The sharp declines come as China’s DeepSeek AI product has overtaken its American competitor ChatGPT in the Apple App Store rankings in the US.
Treasury yields also fell significantly today, along with U.S. futures, which could suggest that investors are moving toward safe-haven assets.
The new product from DeepSeek is free and uses less expensive chips and less computing power than its American counterpart, which is in danger of losing its dominance.
This rapid emergence of the Chinese AI product threatens to push the stock market into a broader phase of decline, as American companies related to artificial intelligence and its infrastructure are leading the upward trend.
DeepSeek uses less advanced H800 chips from Nvidia and spent less than $6 million on training the model, according to Reuters. This low cost raises concerns about the size of demand in the AI market, which the stock market is counting on to continue the bull run.
While it may be too early to conclude that DeepSeek will definitely cause widespread damage to competing American companies, the AI file will now be more present in the negotiations between the US and China, which will also become an additional pressure card in the latter’s hand in the upcoming trade talks.
China has proven that it is once again capable of confronting US sanctions in its pursuit of technological development – think it like the rise of Huawei 2.0 – on the one hand, and it can wave the card of regaining the sovereignty on the home of advanced chip manufacturing, Taiwan, on the other hand.
In another context that may also be disturbing for US stocks this week, the market is awaiting the outcomes of the Federal Reserve’s meeting regarding the monetary policy decision this week. While it is almost certain that there will be no interest rate cut this week, the focus will be, as usual, on the tone of Jerome Powell in the speech following the announcement of the decision.
If the Fed Chairman continues to emphasize the concerns about the upward risk of inflation, the stock market may be subject to further downward pressure. On the other hand, if the Fed becomes convinced that concerns about rising prices due to trade wars were exaggerated in light of the lenient approach that Trump has shown since his inauguration regarding China, Powell may speak in a more dovish tone, which may give the markets a push in an attempt to overcome their downward trend.
For now, we are unlikely to see a rate cut before June, when the probability of seeing rates 25 basis points below their current range is about 45%, according to the CME FedWatch Tool.
Written by Samer Hasn, Senior Market Analyst at xs.com
