What a rough day for companies tied to artificial intelligence! The sudden emergence of China's DeepSeek in the AI scene sent shockwaves through the market, knocking down a slew of companies, regardless of their role in the ecosystem. Let's look at some examples: Hardware suppliers labeled "AI Friendly" took a hit: Nvidia and Broadcom, both providing computing power, plunged 17%. Dell Technologies, known for its servers, dropped 8.4%, while ASML, the semiconductor machinery maker, fell 7%. Data center equipment suppliers weren't spared either: Vertiv nosedived 30%, and Schneider Electric saw a 10% decrease. Energy production equipment suppliers faced similar woes: GE Vernova tumbled 21%, Siemens Energy dropped 20%, and Prysmian slipped 9%. Even energy providers themselves were not immune: Vistra plummeted 28%, and Constellation Energy fell 21%. The standout statistic of the day? Nvidia's market capitalization shrank by a staggering $589 billion in just one day, an unprecedented event. To put this in perspective, it's akin to wiping Novo Nordisk and Siemens off the stock market map—a striking yet illustrative comparison. Nvidia already held the previous record with a $279 billion drop on September 3, 2024, which now seems modest in comparison.

Investors have been on edge, anticipating a market correction, and it seems the answer has arrived from China. The stock market, known for its dramatic mood swings, has shifted from a euphoric "to infinity and beyond" mindset to a doomsday scenario, skipping all the shades in between. Until this weekend, the narrative was all about the AI revolution: buy companies offering AI services, those producing AI hardware (like chips), and even those indirectly involved, such as data center manufacturers and energy providers. However, as of yesterday, the story has changed. The Chinese company DeepSeek has reportedly matched the performance of AI giants like OpenAI and Anthropic, but with significantly fewer resources. This development suggests that the anticipated investment in chips, hardware, and energy might be less than previously expected. 

Let's cut through the noise and get to the heart of the matter. Despite the dramatic downturns that rattled parts of the market, the real impact of the sanctions was mostly felt by companies that had been riding high on inflated valuations. Take Siemens Energy, for instance. Its stock price had skyrocketed tenfold over three years. Then there's Vistra, which was a wallflower on the stock market from 2017 until mid-2023, only to see its value multiply eightfold in just 18 months. Vertiv, once a humble $4.75 five years ago, soared to an eye-popping $156 last week. And let's not even get started on Nvidia. The "animal spirits," as Keynes would describe the irrational exuberance of investors, were certainly alive and kicking. But let's be clear: this wasn't a market-wide meltdown. It was more of a targeted correction, as highlighted by a couple of anomalies that caught my eye this morning.

For example, the Nasdaq 100 took a 3% tumble, while the Dow Jones managed to inch up by 0.65%. The Dow's resilience can be attributed to its classic composition, which offers less exposure to the volatile tech sector. Investors seemed to be seeking refuge in stalwarts like Johnson & Johnson, Procter & Gamble, The Travelers, and Coca-Cola, each climbing over 3%. Interestingly, Apple also saw a 3% rise. Despite lagging in the AI race earlier this year, the tech giant is now reaping the benefits of a sector-wide pullback. Perhaps Apple's cautious approach to AI investment is paying off, at least for now. It's a straightforward theory, but it seems to be holding water in the short term. 

A second example is Meta Platforms, which seems to have pulled a Houdini act on the stock market, managing to rise by 2% despite what could have been a rough day. Just a day earlier, Meta had unveiled plans for hefty investments in AI infrastructure. However, its open-source model, Llama, is losing ground in user rankings to a competitor named DeepSeek, according to the Berkeley rankings I mentioned yesterday. To add to the drama, The Information, a reputable Silicon Valley media outlet, reported last week that DeepSeek's latest version announcement sent shockwaves through Meta's R&D teams, who didn't hide their concern. Yet, Meta's stock seems to have shrugged off these challenges, at least for now.

Europe, it seems, decided to sip its espresso and watch the Nasdaq's drama unfold from a safe distance. While the tech-heavy Nasdaq took a hit, Paris barely flinched, and Switzerland's SMI index even managed to climb a bit. It appears that Europe's slower embrace of technology has turned into an unexpected advantage this time around. Who knew that being a little behind the tech curve could be so beneficial?

Since yesterday, financial analysts have been debating whether we're witnessing a "DeepSeek evolution" rather than a "DeepSeek revolution." The crux of the matter is that developing a high-performance model at a lower cost doesn't signal the end of AI investment. This perspective is likely accurate and serves to calm the market's nerves. However, this situation highlights the risks of narrow-minded thinking and confirmation bias in the financial world. Furthermore, I must admit, I have no clear idea if this will lead to more significant market disruptions. And, truth be told, neither do the experts. At this point, it seems one market excess has simply replaced another, as is often the case.

In a twist of fate, China is rolling out a significant technological breakthrough while its economy struggles to gain traction. Recent macroeconomic indicators paint a bleak picture, with looming threats of increased tariffs and Beijing stepping in once more to support property giant China Vanke. As Chinese markets gear up for the Lunar New Year holiday, the economic landscape remains uncertain. On the global stage, the dollar gained strength following Donald Trump's renewed call for universal tariffs higher than the current levels. Investors are keeping an eye on today's US economic indicators and the first wave of major quarterly earnings reports.

In Europe, SAP SE and LVMH and are set to report, while in the US, RTX Corporation, Stryker, Boeing, Lockheed Martin, Chubb, Starbucks, and General Motors are on the docket. In Asia, Japan's market took a 1.3% hit this morning, whereas India saw a 0.8% rebound. Australia's market dipped slightly by 0.1%. South Korean and Taiwanese markets remain closed. Hong Kong wrapped up a half-day session near the flatline, and Shanghai will stay closed until February 5. Meanwhile, European futures are showing modest gains.

The economic highlights of the day:

The day begins with machine tool orders in Japan, followed by consumer confidence in France. Later, in the US, durable goods orders will be released, as well as FHFA house prices, and finally, the Conference Board consumer confidence index and the Richmond Fed manufacturing index. See the full calendar here.

  • British Pound / US Dollar (GBP/USD): US$1.24
  • Gold: US$2,740.99
  • Brent Crude Oil Spot: US$77.54
  • US 10Y Cash: US$4.55
  • Bitcoin (BTC/USD): US$103,337

In corporate news:

  • AstraZeneca PLC: AstraZeneca and Daiichi Sankyo's breast cancer treatment, Enhertu, has received new approval from the US FDA.
  • Asia Strategic Holdings Limited: Asia Strategic Holdings announced a FY24 revenue of $29.7 million alongside a loss of $3.65 million.
  • SThree plc: STHREE reported a FY24 EPS of GBX37.40 and a revenue of GBP1.49 billion.
  • IDOX plc: IDOX PLC reported a FY24 revenue of GBP87.6 million and earnings per share (EPS) of GBX1.15.
  • Rightmove plc: UK rents outside London have experienced their first quarterly decline since 2019.
  • BAE Systems plc: BAE Systems has secured a £285 million contract from the UK government to upgrade combat management systems on 20 Royal Navy vessels, enhancing their threat detection and deterrence capabilities.
  • GSK plc: The European Medicines Agency is reviewing GSK's Depemokimab for potential use in treating asthma and chronic rhinosinusitis with nasal polyps.
  • Standard Chartered PLC: Standard Chartered has repurchased more than 500,000 shares in the UK.
  • Public Policy Holding Company, Inc.: Public Policy Holding Company Inc has acquired TrailRunner International LLC for a sum that could reach up to USD70 million.
  • Greggs plc: In January, UK shop prices decreased slightly less than in December, while food prices saw their sharpest monthly increase since April of the previous year, a recent survey revealed.
  • Tesco PLC: The UK government, under Prime Minister Keir Starmer and Chancellor Rachel Reeves, is set to convene with leading executives from major British companies to discuss strategies for economic growth and attracting investments to the nation.
  • HSBC Holdings plc: HSBC Holdings bought back 2.3 million of its shares in Hong Kong for an average price of HK$79.66 each.
  • Bloomsbury Publishing Plc: OpenAI is contesting copyright infringement allegations made by book publishers in an Indian court.
  • Rentokil Initial plc: Rentokil Initial announced a 3% organic revenue growth in the fourth quarter.
  • Tertiary Minerals plc: Tertiary Minerals reported a fiscal year 2024 loss of 0.02 British pence per share.
  • Foxtons Group plc: Foxtons Group, a UK real estate agency, exceeded market expectations with its 2024 revenue and operating profit.
  • Computacenter plc: Computacenter has announced a decrease in its revenue for the fiscal year 2024.
  • SAP SE: SAP, a leading European software company, exceeded expectations in Q4 2024 with strong cloud sales and operating income, appointed new executives, restructured its board, raised its profit and sales forecasts due to robust cloud business growth, and reported an 11% increase in annual revenue and a 35% increase in net profit for FY24.
  • AIB Group plc: The Irish Government intends to decrease its ownership in AIB Group PLC from 17.5% to 12.5% by selling a 5% stake to institutional investors.

Analyst Recommendations:

  • Burberry Group Plc: Bernstein maintains its outperform recommendation and raises the target price from 1030 to GBX 1300.
  • 3I Group Plc: Barclays maintains its overweight recommendation and raises the target price from 37.90 to GBP 40.90.
  • Beazley Plc: Citigroup maintains its buy recommendation with a price target raised from 7.99 to GBP 9.70.
  • Rio Tinto Plc: Hedgeye Risk Management maintains its watch list recommendation.
  • Genuit Group Plc: JP Morgan maintains its neutral recommendation and reduces the target price from 4.70 to GBP 4.50.
  • Hays Plc: Jefferies maintains its buy recommendation and reduces the target price from GBX 100 to GBX 90.
  • London Stock Exchange Group Plc: Citigroup maintains its buy recommendation with a price target raised from GBP 130 to GBP 139.
  • Barclays Plc: Citigroup maintains its buy recommendation with a price target raised from 3.05 to GBP 3.20.
  • Diageo Plc: Zacks maintains a neutral recommendation with a price target raised from 129 to USD 132.
  • Anglo American Plc: Bernstein downgrades to market perform from outperform with a target price of GBX 2600.
  • Puma Se: RBC Capital maintains its sector perform recommendation and reduces the target price from 45 to EUR 38.
  • Ryanair Holdings Plc: RBC Capital maintains its outperform rating and raises the target price from 21 to EUR 23.