Markets faced a sharp downturn on Monday as fears of an artificial intelligence bubble burst gripped investor sentiment. The Nasdaq Composite tumbled over 3%, led by steep losses in major AI and semiconductor stocks, following the emergence of Chinese startup DeepSeek’s breakthrough AI model. The S&P 500 also fell over 1%, while the Dow managed modest gains, lifted by defensive sectors and strong performances from key blue-chip stocks. Investors are increasingly cautious as DeepSeek’s cost-efficient AI model raises questions about the sustainability of current valuations in the tech sector. All eyes now turn to major earnings reports and the Federal Reserve’s first policy meeting of the year for clues on market direction.

Key Takeaways:

  • Nasdaq Drops Over 3% as AI Stocks Plunge: The Nasdaq Composite fell 3.07%, closing at 19,341.83, marking its worst single-day performance in months. The sharp decline was led by losses in AI and semiconductor stocks. The sell-off was triggered by the emergence of Chinese AI startup DeepSeek, whose cost-efficient AI model has raised concerns about the valuation of US tech giants heavily invested in artificial intelligence.
  • S&P 500 Slides Amid Broader Market Weakness: The S&P 500 fell 1.46% to 6,012.28, dragged down by losses across technology and energy sectors. Despite the broader decline, defensive rotation into consumer staples and health care provided some support. Notable losses included power providers Constellation Energy, which dropped nearly 21%, and Vistra, which plunged 28%.
  • Dow Gains on Defensive Rotation: The Dow Jones Industrial Average bucked the downward trend, adding 289.33 points, or 0.65%, to close at 44,713.58. Gains in blue-chip stocks such as Apple, which rose on robust demand expectations, and Johnson & Johnson helped offset broader market weakness. 
  • VIX Soars as Market Volatility Spikes: The CBOE Volatility Index (VIX), widely regarded as the market’s “fear gauge,” jumped 45% on Monday to 21.56, up sharply from Friday’s close of 14.85. This marks the index’s largest single-day percentage increase in months, underscoring heightened investor anxiety amid the steep declines in tech stocks. 
  • Treasury Yields Decline as Investors Seek Safety: US Treasury yields fell sharply as investors fled risk assets in favour of safe-haven investments. The 10-year Treasury yield dropped 9 basis points to 4.532%, while the 2-year yield slid nearly 8 basis points to 4.197%. The declines reflect growing caution in the market as the Federal Reserve’s policy decision looms on Wednesday, with a 97% probability that rates will remain unchanged.
  • European Markets Close Lower Amid AI Concerns: The Stoxx 600 index edged down 0.07%, led by a 1.5% drop in technology stocks. The FTSE 100 managed a marginal gain of 0.02% to close at 8,503.71, while Germany’s DAX fell 0.53%, shedding 113 points. France’s CAC 40 declined 0.3%, retreating from its seven-month highs and snapping a nine-day winning streak. European chipmakers ASML and ASM International plunged 7% and 12%, respectively, amid fears of heightened competition from DeepSeek’s breakthrough AI model.
  • Asia-Pacific Markets See Mixed Results: Asian markets were mixed on Monday as investors digested China’s disappointing PMI data and the implications of DeepSeek’s AI developments. Japan’s Nikkei 225 fell 0.92% to 39,565.80, with major chip-related stocks like Advantest (-8.6%) and Tokyo Electron (-4.9%) taking a hit. Conversely, Hong Kong’s Hang Seng rose 0.51%, while mainland China’s CSI 300 dipped 0.41% to 3,817.08. China’s measures to support its stock market, including encouraging state-owned funds to increase equity purchases, provided limited relief amid ongoing concerns over global AI competition. South Korean and Australian markets were closed for holidays on Monday.
  • Oil Prices Decline Amid Broader Market Sell-Off: Oil prices fell roughly 2% as energy stocks mirrored the broader tech sell-off and weak economic data from China weighed on sentiment. Brent crude settled at $77.08 per barrel, down $1.42, or 1.81%, while West Texas Intermediate (WTI) crude dropped $1.49, or 2%, to $73.17 per barrel. Investors remain cautious as concerns over a slowing global economy and potential oversupply persist.

FX Today:

  • EUR/USD Remains Flat Near January Lows: EUR/USD closed at 1.0492 on Monday, unchanged for the day, as it struggled to recover from recent declines. Resistance at 1.0530 continues to cap upside momentum, while key support lies at 1.0450. A break below this level would expose the January low of 1.0300, followed by further downside to 1.0200. For a reversal, the pair must breach the 50-day SMA at 1.0560 and sustain gains toward 1.0600 and 1.0650. Momentum indicators remain muted, with RSI hovering near oversold territory and MACD signalling further bearish momentum. 
  • GBP/USD Struggles to Break Key Resistance: GBP/USD closed at 1.2493, up 0.07% for the session, continuing its recovery from January lows near 1.2300. The pair faces strong resistance near 1.2528, which aligns with the 50-day SMA. A break above this level could open the door to further gains toward 1.2600 and 1.2700, levels not seen since November 2024. On the downside, support lies at 1.2450, with a break below likely exposing the 200-day SMA at 1.2280. Mixed momentum indicators, including a stabilising RSI and a potential bullish MACD crossover, suggest the pair remains in a consolidation phase.
  • USD/JPY Drops Below 155.00 Amid Deepening Bearish Momentum: USD/JPY fell sharply on Monday, closing at 154.67, down 0.82% for the session, as bearish momentum extended from December highs near 158.00. The pair broke below the 50-day SMA at 154.83, placing key support at 154.00 within reach. A breach of this level could push the pair further toward the 200-day SMA at 152.80, with additional downside targets at 151.50, last seen in September 2024. On the upside, the pair needs to reclaim 156.00 to halt the current downtrend and retest December’s highs. Technical indicators, including RSI and MACD, signal continued weakness, with US bond yields retreating and weighing on the dollar.
  • AUD/USD Faces Persistent Pressure Ahead of CPI Data: AUD/USD declined 0.38%, closing at 0.6286, as the pair extended its losses from January highs near 0.6400. Prices have broken below the 50-day SMA at 0.6329, approaching critical support at 0.6250. A sustained breach of this level could see AUD/USD targeting 0.6200 and possibly 0.6100, aligning with multi-month lows. Immediate resistance lies at 0.6329, with a break above potentially reversing the bearish trend. Traders remain cautious ahead of key Australian CPI data, which could determine the Reserve Bank of Australia’s next rate decision.
  • Gold Declines, Testing Key Support at $2,730: Gold prices fell on Monday, closing at $2,741, down 1.03% for the session. The metal struggled to hold above the $2,770 resistance zone, with profit-taking pushing it closer to critical support at $2,730.00. A break below this level could trigger further downside to the 50-day SMA at $2,660.31, followed by additional support at $2,655. Conversely, for gold to resume its uptrend, it must reclaim $2,770.00, targeting $2,800 and the multi-month high at $2,850. Momentum indicators suggest fading bullish strength, with RSI trending lower and MACD signalling weakening momentum. Gold remains up year-to-date but faces near-term headwinds amid market volatility.

Market Movers:

  • Nvidia Suffers Historic Loss Amid AI Sell-Off: Nvidia shares plummeted 16.9% on Monday, marking the largest one-day market cap loss in US history, as fears of overvaluation in the AI sector took centre stage. The sell-off wiped nearly $600 billion from the chipmaker’s valuation. Concerns were sparked by Chinese startup DeepSeek’s cost-efficient AI model, raising questions about the heavy investments in AI development by US giants.
  • Broadcom and AMD Decline Sharply: Broadcom shares fell 17.4%, while AMD dropped 6.4%, as the semiconductor sector was hit hard by fears of an AI bubble burst. The VanEck Semiconductor ETF (SMH) plunged nearly 10%.
  • Microsoft and Oracle See Steep Losses: Microsoft shares slid 2.1%, while Oracle tumbled 13%, amid rising doubts about the returns on massive investments in AI data centres. Microsoft plans to spend $80 billion in its fiscal year 2025, with half allocated to U.S.-based projects.
  • Power Stocks Dive Amid AI Concerns: Companies tied to AI-related energy demands saw significant losses. Constellation Energy dropped nearly 21%, while Vistra tumbled 28%. GE Vernova and Talen Energy also fell sharply, both declining more than 21% as investor sentiment soured on AI infrastructure plays.
  • Crypto Stocks Hit by Tech Rout: Stocks linked to cryptocurrencies faced pressure amid broader tech sector weakness. Coinbase lost 6%, and MicroStrategy dipped 1%. Bitcoin miners powering AI ventures were hit even harder, with Core Scientific plunging 29% and TeraWulf down 29%. Iren, formerly known as Iris Energy, fell 24%.

Monday’s market action underscored heightened investor caution as fears of an AI bubble burst rattled the tech-heavy Nasdaq, which plunged over 3%, marking its steepest decline in months. Semiconductor and energy stocks bore the brunt of the sell-off, with Nvidia and Broadcom leading the losses. Defensive sectors provided some stability, helping the Dow Jones post modest gains, while European markets mirrored the tech weakness and Asian equities saw mixed results amid concerns over China’s economic data. The sharp rise in the VIX “fear index” highlighted the market’s fragility as traders braced for key earnings reports from major tech players and the Federal Reserve’s upcoming policy decision. With the AI sector’s valuations under intense scrutiny and macroeconomic uncertainty lingering, markets face a volatile week ahead.