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China's DeepSeek sets off AI market rout

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China's DeepSeek sets off AI market rout
Nasdaq futures slumped and technology shares slid in Japan on Monday as surging popularity of a Chinese discount artificial intelligence model wobbled investors' faith in the profitability of AI and the sector's voracious demand for high-tech chips.

Nasdaq 100 futures were down 2.6% and S&P 500 futures slipped 1.4% by the European morning, and shares in Nvidia (NASDAQ:NVDA) supplier Advantest fell 8.5% in Tokyo.

Frankfurt-listed shares of Nvidia slipped about 7%, while those of Tesla (NASDAQ:TSLA), Amazon (NASDAQ:AMZN) and Meta (NASDAQ:META) fell more than 2% in early European trading.

Startup DeepSeek has rolled out a free assistant it says uses lower-cost chips and less data, seemingly challenging a widespread bet in financial markets that AI will drive demand along a supply chain from chipmakers to data centres.

"It's a case of a crowded trade, and now DeepSeek is giving a reason for investors and traders to unwind," said Wong Kok Hoong, head of equity sales trading at Maybank. AI-focused startup investor SoftBank (TYO:9984) Group slid more than 8%, on course for its biggest one-day fall since Sept. 30. Last week it announced a $19 billion commitment to fund Stargate, a data-centre joint venture with OpenAI.

Chip-making equipment giant Tokyo Electron fell 5%.

Tech-heavy markets in Taiwan and South Korea were closed.

European tech stocks, especially Dutch computer chip equipment maker ASML (AS:ASML), which counts Taiwan's TSMC, Intel (NASDAQ:INTC) and Samsung (KS:005930) as its customers, will likely face pressure at the open.

Shares of Nvidia, the poster child of AI, have risen 196% since the start of 2024, outperforming the 35% gain in the Nasdaq.

Little is known about the small Hangzhou startup behind DeeepSeek, but its assistant leapfrogged rival ChatGPT to become the top-rated free application on Apple (NASDAQ:AAPL)'s App Store in the United States on Monday.

DeepSeek researchers wrote in a paper last month that the DeepSeek-V3 model, launched on Jan. 10, used Nvidia's H800 chips for training, spending less than $6 million.

H800 chips are not top-of-the-line. Initially developed as a reduced-capability product to get around restrictions on sales to China, they were subsequently banned by U.S. sanctions.

Besides chips, data centres and related companies also took a hit on Monday, with Malaysia's utility conglomerate YTL Power falling 7% in Kuala Lumpur to its lowest in two months.

"The market is questioning the capex spend of the major tech companies," said Nick Ferres, chief investment officer at Vantage Point Asset Management in Singapore, noting that positioning had become crowded.

To be sure, much remains unknown about the details of DeepSeek's development and the hardware it uses.

"The idea that the most cutting-edge technologies in America, like Nvida and ChatGPT, are the most superior globally, there's concern that this perspective might start to change," said Masahiro Ichikawa, chief market strategist at Sumitomo Mitsui (NYSE:SMFG) DS Asset Management. "I think it might be a bit premature."

Markets reaction in China was also mixed, with a CSI300 index of AI shares down 2.2% but big data stocks up 4%.

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