Markets are notoriously poor at accounting for extremely low-probability yet highly consequential risks. This is the essence of the “black swan” concept, originally articulated by the philosopher John Stuart Mill in the 19th century. Before Europeans discovered black swans in Australia, it was reasonable to assume that all swans were white – an assumption that, while widely held, could never be conclusively proven. While it may be premature to call yesterday’s tech stock selloff a black swan event, it certainly shattered the market narrative that had dominated since Donald Trump’s re-election in November: an America First, tech-driven optimism marked by a bullish outlook for stocks and fuelled by deregulation, tax cuts, and government-backed AI investments.
So what exactly happened? The emergence of Chinese AI startup DeepSeek’s R1 model sent shockwaves through global markets due to its disruptive cost advantage over industry leaders. The model’s significantly lower development cost highlighted the potential for Chinese firms to undercut US tech giants, raising concerns about a shift in global technological dominance. This prompted a sharp selloff in tech stocks, as investors reassessed the competitive landscape, while simultaneously driving a broader flight to safe-haven assets, reflecting heightened uncertainty about the future balance of power in the global AI industry.
While it may be tempting to attribute the tech selloff entirely to DeepSeek, it’s important to recognize that financial markets are currently more vulnerable than they have been in years. This stems from the ongoing global tightening of liquidity conditions, largely driven by major central banks. Many central banks continue to implement quantitative tightening, compelling markets to absorb increased bond supply. This coincides with elevated bond issuance, as governments show little restraint in their fiscal policies. The combined effect is a steady withdrawal of liquidity from the global financial system, leaving less fuel to support stock market rallies.
ZAR Markets
As a bellwether for EM currency risk, the ZAR was among the worst-performing currencies during yesterday’s market rout. It depreciated to levels back above R18.7500/$, with further losses potentially in-store today. The long-term implications of DeepSeek’s disruption could accelerate a re-evaluation of valuations and investment strategies in the AI space, raising risks of a deeper equity correction in an overheated market. As equities come under pressure, so, too, risk aversion takes hold more broadly. This is why the US tech market’s moves are important for ZAR traders to keep an eye on. Investor will now be trying to determine whether the DeepSeek selloff was a fleeting moment that would quickly pass or whether it is something that could gather momentum. Much will depend on the extent of the selloff today.
Global FX Markets
The Japanese yen weakened after giving up earlier safe-haven gains, while the U.S. dollar rebounded slightly following a broad market shakeout triggered by the emergence of China’s DeepSeek AI model. This disruptive technology caused significant volatility, leading to a global sell-off in tech stocks. Additionally, U.S. President Donald Trump’s renewed tariff threats on imports of computer chips, pharmaceuticals, and steel added to market jitters, with additional 25% tariffs on goods from Canada, Mexico, the EU, and China potentially taking effect by February 1. Treasury Secretary Scott Bessent’s approach to implementing these tariffs is being closely monitored. Meanwhile, the Federal Reserve began a two-day meeting, expected to maintain interest rates, with markets looking for signals of potential rate cuts if inflation moderates further. The euro weakened ahead of an anticipated rate cut by the European Central Bank, while the British pound and risk-sensitive currencies like the Australian and New Zealand dollars also declined. Treasury yields dropped to a one-month low as investors sought safer assets. Bitcoin remained stable at $101,421, though below its recent peak, amid speculation about regulatory changes under Trump’s administration. Overall, markets are grappling with uncertainties surrounding disruptive AI technologies, U.S. trade policies, and economic growth prospects, with analysts forecasting slower growth, higher unemployment, and limited inflation progress in the year ahead.