DeepSeek sparks tech sell-off

Global markets reel as China's DeepSeek disrupts AI dominance, while pivotal central bank decisions from the Fed, BoC, and ECB set the stage for a data-packed week.

By Ahmed Azzam | @3zzamous | 27 January 2025

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  • DeepSeek’s cost-efficient AI model rattles markets, challenging US tech dominance.

  • The Fed is expected to hold rates steady at 4.25–4.50%, with focus on future guidance.

  • BoC eyes a cautious 25 bps rate cut as inflation dips to 1.8%.

  • ECB poised for another 25 bps cut, maintaining its gradual easing approach.

DeepSeek Buzz

Global markets faced sharp declines as growing concerns over the United States' AI leadership sparked a tech sell-off. Chinese startup DeepSeek grabbed headlines with its cost-effective AI model capable of running on less-advanced chips, casting doubt on the dominance of cutting-edge US technology.

The tech-heavy Nasdaq 100 futures tumbled 5.2%, marking their steepest intraday drop since August, while Europe’s STOXX 50 slid over 1%. DeepSeek, based in Hangzhou, surged to the top of Apple’s App Store free apps chart on Monday, outperforming established AI tools.

While the long-term impact of DeepSeek’s innovations remains uncertain, its emergence in China's dynamic tech landscape has unsettled investors. The development spurred a recalibration of risk, with market participants shifting toward safe-haven assets and currencies.

Three central banks meetings, one busy week

This week, three major central banks—the Federal Reserve, Bank of Canada (BoC), and European Central Bank (ECB)—are set to unveil their latest policy decisions, with global markets bracing for potential shifts.

  • Federal Reserve: The Fed is widely expected to maintain its benchmark rate at 4.25–4.50%, pausing its easing cycle after multiple cuts in 2024. Futures markets assign a 98% probability to a hold, leaving little room for surprises.

Attention will center on Chair Jerome Powell’s remarks for insights into the duration of the pause and any hints about future rate cuts. Current market pricing suggests a 72% chance of no change at the Fed’s March meeting, although a 25-basis-point cut remains a possibility later in the year.

  • Bank of Canada: With inflation easing to 1.8% in December, the BoC is expected to proceed cautiously with a 25-basis-point cut, bringing its policy rate down from 3.25%. This move reflects the central bank’s focus on gradually steering rates closer to neutral, estimated at 2.25–3.25%.

The BoC’s latest Monetary Policy Report will shed light on its economic outlook and whether additional rate cuts to stimulate the economy may be on the horizon.

  • European Central Bank: The ECB is poised to reduce its deposit rate by 25 basis points to 2.75%, consistent with President Christine Lagarde’s “gradual” approach to reaching a neutral rate. Policymakers appear united in their view that rates need not fall into stimulative territory, potentially pausing cuts when the deposit rate nears 2%.

A data-heavy week ahead

Beyond central bank decisions, a slew of economic reports is set to dominate investor attention.

  • United States: Key releases include advance GDP figures and PCE inflation data, which could influence market sentiment and future Fed policy.
  • Eurozone: GDP data and Germany’s Ifo business climate and GfK consumer sentiment surveys will be closely watched for signs of stabilization in Europe’s largest economy.
  • Australia: Inflation data may guide the Reserve Bank of Australia’s decision on whether to cut rates in February or delay until May.
  • Canada: GDP figures are expected to round out the week, offering further insights into the health of the Canadian economy.