Tech sells off amid AI competition

Financial markets plunged overnight on the release of a new AI model from a Chinese firm that is able to operate with a much lower technology burden. Nvidia, which designs chips used in AI model systems and is one of the world’s most valuable companies, endured a 17% drop in its stock price and wiping out almost USD 600bn of its capitalization. US equity markets were hit hardest given the share of tech firms listed in the US while haven assets like the Japanese yen and US Treasuries rallied. The stock market sell off comes just a few days ahead of the first FOMC meeting of the year and while the drop in equity markets will no doubt be discussed it is unlikely to factor into the Fed’s decision to keep rates on hold as the impact is contained in specific sectors, rather than reflecting a broader macroeconomic issue.

Scott Bessent, the US Treasury secretary, said he favoured a universal 2.5% tariff on goods imported into the US that would be applied gradually. However, President Donald Trump said he wanted “much higher” levels. The lack of a consistent message on the US’ trade stance will add to uncertainty in financial markets.

Germany’s IFO business climate index improved in January to 85.1 from 84.7 a month earlier and was also ahead of expectations. The improvement was all down to assessment of current conditions which rose to 86.1 from 85.1 while firms grew more pessimistic on the outlook with the expectations component falling to 84.2 for January, down from 84.4. Germany faces the risk of the Eurozone enduring US tariffs and the political uncertainty over an upcoming election at the end of February. The ECB meets later this week on January 30 and is expected to cut rates again by 25bps.

Saudi Arabia has announced that firms with up to 49% foreign ownership will be able to purchase property in Makkah and Madinah. The decision prompted a rally in listed Saudi real estate developers.

Abu Dhabi recorded a 24% y/y increase property transactions in 2024 according to press reports citing the Abu Dhabi Real Estate Centre. The total number of transactions rose to 28,249 with a total value of AED 96.2bn. Foreign investment rose to AED 7.86bn.

The President of the UAE, Sheikh Mohamed bin Zayed, signed a memorandum of understanding with the prime minister of Georgia, Irakli Kobakhidze, covering investment of up to USD 6bn in real estate projects in the Caucasian country. The flows would represent a sizeable upgrade of FDI into Georgia.

Today’s Economic Data and Events

• 17:30 US Durable goods orders Dec: forecast 0.6%
• 19:00 US Conference Board consumer confidence Jan: forecast 105.9

Fixed Income

• US Treasuries rallied overnight as investors sought safety but those gains were fading by the end of the day. Yields on the 2yr UST fell to as low as 4.16% at one point before edging higher, recording a fall of 7bps for the day as a whole. It was a similar story in 10yr USTs with an end of day close lower by almost 9bps at 4.5343%.
• Global bond markets endured the sell-off with out too much pain with an index of US corporate debt managing to move higher overnight.
• Regional indices of USD-denominated bonds also pushed higher with a broad GCC benchmark up 0.4% overnight.

FX

• Currency markets showed a typical flight to safety with the Japanese yen rallying, USDJPY fell almost 1% to 154.51, and the Swiss franc also gaining: USDCHF fell 0.4% to 0.902. Elsewhere the moves were more contained with EURUSD ending the day near unchanged at 1.0492 while GBPUSD ticked higher by 0.1% at 1.2499.
• Commodity currencies as a rule were weaker with USDCAD up 0.2% at 1.4374, AUDUSD down 0.3% at 0.6293 while NZDUSD fell 0.3% to 0.5693.
• In emerging markets the Indian rupee drifted weaker with USDINR up 0.2% at 86.34 while USDTRY settled at 35.7446, up 0.2%.

Equities

• The NASDAQ endured the heaviest selling pressure overnight as tech stocks plummeted. The overall index fell by more than 3% while the Magnificent 7 companies saw a drop of just 2.7% as the rout was largely contained to Nvidia. The S&P 500 fell 1.5% while the Dow Jones actually managed to tick higher by about 0.7%.
• Regional markets fell overnight with the DFM off by 0.7% and the ADX down by 0.1%. The Tadawul dropped 0.1% while the EGX 30 fell almost 1% and major stock indices in Turkey were lower by around 1%.

Commodities

• Oil markets were caught up in the selling pressure overnight with Brent lower by 1.8% at USD 77.08/b and WTI down 2% at US 73.17/b. The focus in commodity markets is much more on the volatility of US trade policy and its potential impact on global growth.
• Gold failed to hold up as a haven overnight, down 1.1% while silver also paced the decline with a 1.2% drop. Elsewhere industrial metals were broadly weaker with drops in aluminium, copper and iron ore prices.