It was supposed to be a week when the main excitement would come from the Fed meeting and earnings season, but that did not happen. The week began very sharply and unexpectedly. American stock markets were shaken at their core when DeepSeek appeared on the scene. This is a Chinese language model that may rival the hitherto uncatchable ChatGPT. Moreover, this model was developed with much smaller resources than the investments that fueled AI development in the West. It was an unexpected “black swan” that waved unpleasantly at the markets. What should we take away from all of this?
The Fall of Nvidia Stocks
Nvidia’s stock became the symbol of the crash, losing over 18% in just one day. As a result, it set a record in terms of lost market capitalization. Since it is one of the TOP 3 largest companies in the world, an 18% drop represents an enormous sum – Nvidia lost over $600 billion in just one day. This number is comparable to the annual GDP of Switzerland or Poland. It is incredible when such a huge value disappears in one day. This figure is worth remembering whenever you hear that the markets are not overvalued.
I personally believe that Nvidia’s stock is receiving undue attention because of DeepSeek. Of course, the new Chinese language model will influence the entire sector, but its impact on Nvidia’s stock does not necessarily have to be negative. The volume of chips sold is likely to increase, as China will build data centers throughout Asia. Moreover, Nvidia has developed several chip models (H800, H20, L20, and L2) that comply with American export restrictions and are allegedly sufficient to run DeepSeek.
However, doubts have arisen – for example, Elon Musk and others questioned whether DeepSeek could be developed by a “garage” company with a total investment of only $6 million. This amount is truly incredible, but in a certain sense, it might not matter. Even if the investment were $6 billion, it would still be much less than what companies from the “Magnificent Seven” invested in AI.
Will Investors Reassess Their Relationship with Artificial Intelligence?
It will be very interesting to see how the Trump administration deals with DeepSeek. For them, it represents a problem from several perspectives. During his inauguration, Trump announced the establishment of the company Stargate, whose goal was to maintain the USA’s technological edge in artificial intelligence. Its main rival was supposed to be China. Thanks to the embargo on Nvidia’s most advanced chips, China was expected to fall behind in research for several years. However, that did not happen.
America may have to reconsider its entire ban strategy, because it has proven to be quite ineffective. In today’s globalized world with an enormous circulation of goods and services, such bans make little sense. Nevertheless, some analysts believe that the Trump administration will extend the embargo to other Nvidia product lines. This was also the reason why the company’s stocks further weakened after Tuesday’s pullback during the week.
By the way, the main actors of the Stargate project, Oracle and SoftBank, experienced a very bad week on the financial markets. It is far from certain whether they will recover from these losses anytime soon. Another company that was supposed to participate in the project – OpenAI – accused DeepSeek of data theft. This only shows the level of panic among the major players in the field of artificial intelligence.
Is DeepSeek Redrawing the Geopolitical Map?
From the whole situation, we can draw two conclusions. First: DeepSeek is changing the geopolitical balance between China and the USA. The USA not only lost its trump card, but more importantly, it lost its long-term strategy which relied on keeping engineering and manufacturing in China, while the USA was supposed to become a powerhouse in new technologies such as AI or quantum computers. China can now begin to push the USA out of these segments – first in Asia, but possibly in Europe as well.
The second long-term effect is that investors will become far more cautious regarding the return on investments in artificial intelligence. It will no longer be enough to merely announce massive investments in AI, as has been the trend over the past two years. Projects will have to demonstrate clear economic value. Artificial intelligence will have to earn its keep – mere optimization of work processes will not suffice. Investors will start to be more cautious.
Nassim Taleb commented on the entire DeepSeek episode by saying that we have witnessed the first “crack in the ice” – the first small fracture in the perfect image of artificial intelligence. According to him, additional small cracks will follow that will gradually merge into one large hole, eventually bursting the entire bubble. Taleb, however, does not hold a high opinion of technological stocks in his portfolio.
A Prudent Fed and an Unyielding ECB
Another very important event of this week was the central banks’ meetings. The American Fed acted exactly as expected, leaving interest rates unchanged, noting that inflation risks still persist. However, the developments surrounding DeepSeek largely overshadowed the Fed’s actions, so the impact on the markets was very small.
The most pronounced reaction to the Fed’s decision was seen in yields on American bonds, which began to rise again. Another major reaction was observable on the FedWatch Tool, which measures market expectations regarding rate developments. The probability that the Fed will keep rates unchanged in March rapidly increased to over 83%.
The last interesting point was Powell’s statement that he had not yet met the American president. This suggests that the relationship between them is not ideal. Trump has repeatedly expressed dissatisfaction with the level of interest rates. Given that the Fed is supposed to be independent of the American president’s political decisions, Powell is in a significant advantage.
Furthermore, he has more than a year left in his current term, so he can withstand the president’s pressure by arguing that he needs more data to assess the impact of his policies on the American economy. From this perspective, it seems likely that the first rate cut or a significant change in restrictive monetary policy may not come until the summer.
The ECB Does Not Intend to Change Rates – They Will Fall
In contrast to the cautious stance of the Fed, Christine Lagarde’s decisive approach at the ECB was notable. As expected, the ECB lowered interest rates by 25 basis points to 2.75%, further widening the gap between US and Eurozone rates. Since the ECB plans to continue lowering rates at every meeting, further weakening of the euro against the dollar can be expected.
Given that the latest GDP data from Germany and France confirmed a significant slowdown in those economies, it is logical that the central bank is trying to support the economy with lower rates. However, the problem may be that rate cuts will not please Donald Trump. It is uncertain whether it is strategically wise to further provoke Trump with aggressive rate cuts, especially when the introduction of new tariffs is being considered.
Lagarde’s stance suggested that she is still living in a world before major geopolitical changes. We will see how long this ECB boldness lasts – it wouldn’t be surprising if at the next meeting they announced a need for a pause in the process of monetary policy easing.
Stock Indices: European Indices Fared the Best
A very eventful week ultimately brought the best results for European stocks. The German DAX continued to rise, despite German GDP developments indicating continued stagnation. The German economy may not see any bright prospects yet, but the DAX is living its own life and breaking one record after another. This week it added 1.58%.
Even better was the performance of the London stock exchange, which rose by 2.02%. On the other hand, the French CAC 40 was dragged down by poor results from the LVMH group. One of the richest people in the world, the CEO of this luxury-sector company, stated that the situation in France is “depressing.” There is no positive outlook to be discussed.
Chinese exchanges halted trading during the celebration of the Chinese New Year, so the markets did not operate all week. Nevertheless, Chinese stocks performed well, led by Alibaba. DeepSeek once again reminded everyone of the potential of the Chinese economy. Hong Kong’s Hang Seng index added 0.79%. The Japanese Nikkei index mirrored American indices and fell by 0.81%.
In the USA, Monday’s crash was so severe that it influenced the results for the entire week. The Friday session was once again marked by concerns over the imposition of tariffs. In this context, the S&P 500 fell by 1%. The industrial Dow Jones, however, rose by 0.27% as investors turned to defensive stocks, which are once again in favor. The worst performer was the technological Nasdaq, which declined by 1.64%.
Cryptocurrencies: Bitcoin Caught in Conflicting News
At the time of writing this article, the price of Bitcoin had once again fallen deeply below the psychological threshold of $100,000 – down to under $92,000. During the last week, however, Bitcoin traded mostly above $100,000. Then a series of events unfolded that sent Bitcoin’s price downward.
At the beginning of last week, developments around DeepSeek hurt Bitcoin, because for many investors Bitcoin’s price is tied to that of technology stocks. However, this correlation is more based on the perception of technology stocks and Bitcoin as risky assets than on the direct influence of Nvidia’s or other tech companies’ results on Bitcoin’s price.
Subsequently, Bitcoin stabilized following the Fed meeting. Many analysts questioned whether Bitcoin could survive without the hint of the first pause in rate hikes, since the prospect of lower rates helped Bitcoin grow in 2024. Bitcoin’s price was positively influenced by the weak US GDP estimate for the last quarter of 2024.
The US GDP for this period reached 2.3%, which was significantly worse than analysts’ expectations of 2.6%. Here, the principle of “a bad news is actually good” worked, because if the American economy continues to slow down, the Fed will soon have to lower rates.
In contrast, the end of the week brought negative sentiment for Bitcoin due to the imposition of tariffs. Why are tariffs negative for Bitcoin? It is not that the tariffs directly affect cryptocurrencies or the crypto industry, but that the imposition of tariffs strengthens the dollar. And a strong dollar is not good news for Bitcoin.
In the long run, we see that Bitcoin can relatively easily rise above the $100,000 threshold, but subsequent attempts to reach new all-time highs have not succeeded. Crypto investors would need some strong positive news. The problem is that the supply of these growth catalysts is currently exhausted.
Conclusion: What Will the Upcoming Earnings Tell Us?
The last week of January brought many interesting events. We witnessed the release of earnings results from the largest technology companies and a new record in gold prices, but unfortunately, the “hype” is not sustainable. I hope that I will soon be able to offer Kryptomagazin readers a separate article summarizing the most interesting results and market reactions to them.
The earnings season will continue this week. We will learn the financial results of companies such as Alibaba, Palantir, Alphabet, Pepsi, AMD, Pfizer, Walt Disney, Qualcomm, Arm, Amazon, Eli Lilly, and L’Oréal. We are also expecting important macroeconomic data, especially figures from the US labor market. The Bank of England will also meet to decide on the interest rate for the British pound. Most analysts expect that rates will remain unchanged. In addition, Donald Trump will continue to supply the markets with his proposals for new tariffs. It is certain that next week will be anything but boring.