BOSTON: U.S. technology shares dropped sharply on Monday as surging interest in Chinese startup DeepSeek's low-cost artificial intelligence model raised doubts about the sector's lofty valuations.
The tumble in global equities prompted a widespread flight to safety, with U.S. government bonds rising and safe-haven currencies - the yen and Swiss franc - surging.
DeepSeek, which overtook rival ChatGPT to become the top-rated free application on Apple's App Store in the U.S., says it uses lower-cost chips and less data, challenging a bet in markets that AI will drive demand along a supply chain from chipmakers to data centers.
On Wall Street, the Dow Jones Industrial Average rose 0.65%, but the S&P 500 dropped 1.5%, and the tech-heavy Nasdaq Composite slumped about 3%.
Nvidia, whose chips are the top choice for powering AI applications, dropped about 17%, in line with industry peers Broadcom and Marvell Technology.
The CBOE Volatility Index, known as Wall Street's fear gauge, jumped 20%.
“The catalyst of a foreign competitor to U.S.-led AI dominance begs other questions about trade and semiconductor chips and energy needs,“ Robert Savage, head of markets strategy and insights at BNY, wrote in a note. “The markets are unsettled, and volatility is higher after last week’s strong returns.”
In Europe, the pan-European STOXX 600 index was little changed, but the STOXX Europe 600 technology index fell more than 3%, its biggest one-day drop since mid-October. MSCI's gauge of stocks across the globe fell about 1%.
BROAD RISK-OFF MOOD
U.S. Treasury yields tumbled to multi-week lows, tracking steep declines in equities, as investors sought the safety of government bonds.
The benchmark U.S. 10-year yield dropped 9.1 basis points to 4.532%. That pushed the dollar lower, with safe-haven currencies as the main beneficiaries.
“Haven demand has spilled over into FX,“ said Shaun Osborne, chief FX strategist at Scotiabank.
“Part of the dollar’s slippage can be accounted for by the sharp fall in bond yields,“ Osborne added.
The dollar fell nearly 1% against the yen and 0.4% against the Swiss franc, two currencies that often gain during periods of market unease.
The dollar index, which measures how the U.S. currency trades versus a basket of peers, declined 0.3%, around its lowest level since Dec. 18.
U.S. import tariffs remain a key theme, with President Donald Trump so far refraining from implementing broad trade levies.
China, Mexico and Canada are facing a nervy wait after Trump last week earmarked Feb. 1 for additional tariffs on top trading partners.
The U.S. dollar rose around 2% against the Mexican peso and 0.2% against its Canadian counterpart. The Chinese yuan was little changed versus the dollar in offshore trading.
The dollar also rose 0.4% against the Colombian peso after a short-lived spat over deportations. On Sunday, Trump threatened Colombia with tariffs and sanctions to punish it for refusing to accept military flights carrying deportees, but Colombia later said it would accept repatriation flights and the U.S. sanctions threat was put on hold.
Monday's market volatility kicks off a busy week in which both the U.S. Federal Reserve and the European Central Bank meet to set interest rates.
“The Fed is likely to keep rates steady, and markets have embraced our view of higher-for-longer rates,“ BlackRock Investment Institute strategists wrote in a note on Monday.
“We think the ECB has more room for further cuts,“ they added. “Yet like in the U.S., we see structural constraints keeping inflation and rates higher than pre-pandemic.”
Oil prices fell about 2% on Monday as the deal with Colombia reduced immediate concern over oil supply disruptions.
Gold prices declined more than 1%, retreating from near-record highs seen in the last session, as investors liquidated bullion positions, along with a broader market sell-off sparked by DeepSeek.
Leading cryptocurrency bitcoin slumped 3.5%, dropping below $100,000 for the first time in a week before rebounding to $101,455.
