GLOBAL MACRO: Could The Tech Sell-off Have More Legs?

DeepSeek’s impact on financial markets was very obvious at the start of the week, particularly in terms of tech share indices (and most obviously through Nvidia’s share price). This steep drop has highlighted concentration risks in the sector and we outline below potential watch points for further signs of stress in this space, which could impact financial markets more broadly. 

• Prior to the fall, Nvidia’s stock success brought with it unintended consequences for the S&P 500, leading to it becoming the most concentrated it has been since the dot-com crash of 2000.
• This concentration has also hidden the underlying issues with the members of the S&P where only just over 20% of the stocks were able to outperform the index in recent years.
• Not only via their S&P allocations, but through direct allocations, investors globally are potentially lacking investment diversity, with a dramatic over exposure to a select few tech stocks.
• Importantly, there are signs exist that this new found ‘tech sell-off’ may have more to run.
• Gold usually enjoys ‘safe-haven’ status, meaning that in times of stress in markets, it usually advances. Yet gold, which is coming off one of its best years ever in 2024, fell just over 1% on Monday during the tech sell off.
• Traders indicate that gold contract positions were being liquidated by investors exposed to the tech sector, freeing up capital in markets that were remaining liquid, causing gold to move in a direction opposite to what it normally would have.
• Similarly in Japan, Japanese Government Bond investors began buying JGB’s, another ‘safe-haven’ asset despite the Central Bank raising rates in its most recent meeting.
• Local Japan investors have been buying offshore stocks for the past 7 weeks (per weekly flow data) Since early Dec over Yen2 trillion of flows have left domestic markets into offshore equities making Japanese investors potentially over exposed to US tech (although this only partially reverses prior outflows seen since Oct last year).
• Interconnectivity cannot be ignored in financial markets and whilst moves in recent days may not yet spell the beginning of a sustained move lower, the impact on ‘safe-haven’ assets as a bell weather for broader market implications, cannot be ignored.
• Deepseek’s entrance without question has brought about uncertainty to the entire AI ecosystem at a time where most likely, investors have been ‘jumping on the Nvidia’ bandwagon, to chase even more success.
• To understand what happens next, don’t just watch Nvidia’s share price, rather look for erratic behaviour of other asset classes as a potential indicator that Deepseek’s impact could be more than just the AI ecosystem; and in fact challenge investor appetite and asset allocation globally. 
• The geopolitical shifts in this space will also be in focus. Just days before Deepseek’s impact on markets, U.S. President Donald signed an executive order related to AI to "make America the world capital in artificial intelligence."