On Monday 27th January 2025 global investors dumped tech stock as a new player from China called DeepSeek, emerged in the AI (artificial intelligence market) threatening the dominance of the United States as companies such as Nvidia had a record one day loss of circa USD593 Billion. Other major shares tumbled such as chipmaker Broadcom down 17.4%, Alphabet fell 4.2%, and Marvel Technology fell by 19.1% to mention but a few. The catalyst for this fall was DeepSeeks AI model named RI which by all accounts uses less data at a fraction of the cost compared to that of the competition.
Many hedge fund traders saw an opening for dispersion trades which buys options in single stocks and sells contracts on an index and as such this trade had its best day since 2020 as fears for A! spread through the market like wildfire. The dispersion trade therefore is a bet on an index remaining calmer than its individual stocks. Once the domain of the hedge funds, the dispersion trade is now offered by banks to their clients which they have packaged into easy to access swaps. The Cboe S&P 500 Dispersion index* enjoyed its biggest gain since 2022.
*Cboe S&P Dispersion Index – This index may provide an indication of the markets perception of the near-term diversification or equivalently, an indication of the markets perception of the near-term of idiosyncratic risk in the S&P 500’s constituents. In simple terms dispersion refers to the range or spread of individual stock returns around the index’s average return.
Essentially dispersion trading is a form of arbitrage, specifically volatility arbitrage which as mentioned above is betting on the volatility of individual stocks against a more placid index where the stocks are quoted. A simple explanation of arbitrage is the selling and buying of the same stock, currency, or commodity at the same time in two different markets but where there is a small price differential. The profit between buying at the lower price in one market and selling at the higher price in another market is known as arbitrage trading.
Elsewhere, the sell off in tech stocks benefited a number of quant trades where the trading model is going long on some stocks and short on others. This is a strategy that buys steady stocks and sells the opposite (in this case tech stocks) which according to analysts jumped the most since 2020. Again, when the two positions are traded out the profit (or loss) is the arbitrage from the two trades.
In his latest pronouncements on tariffs, President Trump announced that he would enact cross-border tariffs higher than 2.5%, a figure apparently propounded by the incoming Treasury Secretary, Scott Bessent. The President told reporters aboard Air Force One that “I have in mind what it’s going to be, but I won’t be setting it yet, but it’ll be enough to protect our country”. This is yet another signal from the President that he is prepared to reshape supply chains through the introduction of tariffs in order to put “America First”.
President Trump went to tell reporters that he would be using tariffs to target specific sectors such as aluminium, copper, pharmaceuticals, semiconductors, and steel. He also advised that he may well target Mexico and Canada with tariffs on their automobile exports to the United States, the same countries that he has already targeted with tariffs of 25% on all exports to the USA (to be imposed on 1st February 2025). President Trump’s underlying belief is that tariffs on countries exporting to the United States will increase the number of jobs at home, bring factories back, and taxes on businesses and individuals will come down.
Interestingly, the threat of tariffs on the semiconductor sector came shortly after the Chinese start-up on AI (artificial intelligence) DeepSeek* not only worried investors but erased billions from the market capitalisation of Nvidia Corp**. It appears the DeepSeek model can be as effective as other well-known AI models but at a fraction of the cost. This has translated into less data centres signing up to the likes of Nvidia, as DeepSeek can drive down the consumption of electricity, and they now challenge the assumption that the United States hold dominance in the AI market.
*DeepSeek – Until very recently, DeepSeek was a little known Chinese start-up, but has sent shockwaves through the tech market having released an AI model named RI that can outperform leading developers from the United States such as Nvidia, OpenAI, and Google. Is reported that DeepSeek only had a USD 6 Million budget to produce RI, as opposed to the multibillion dollar budgets employed by their US counterparts.
**Nvidia – Is famous for accelerated computing to tackle challenges no-one else can and their work on AI and digital twins is transforming the world’s largest industries. Their work on AI using a GPU (graphics processing unit as opposed to a CPU – central processing unit) allows them to crunch massive amounts of data for AI much faster. When RI cast doubt on the supremacy on of US tech firms, Nvidia shed circa USD590 Billion in market value which was the biggest fall in US stock market history.
President Trump said of DeepSeek, “The release of DeepSeek should be a wake up call for our industries and that we need to be laser-focused on competing to win”. On Monday 27th January 2025, there was a major market fall-out regarding DeepSeek, with technology stocks in Europe and the United States falling by circa USD1 Trillion, with investors now questioning the spending plans of some of the biggest companies in the USA.
On the tariffs front, experts are saying this economic tool will not just be used against those countries with just a trade surplus with the United States. Indeed, President Trump will use tariffs in other areas such as the recent spat with Colombia, where the country’s President Gustavo Petro barred and refused landing rights to two military flights from the United States carrying deported Colombians. President Trump threatened punitive tariffs of 25% on Colombian exports to the USA unless the Colombian acquiesced, and despite counter tariffs being threatened, President Petro agreed to accept migrants (including those arriving on military aircraft) without limitation, hindrance or delay.
Elsewhere on the Trump/Tariff radar, Europe and the EU bloc has been threatened with tariffs regarding those countries with trade surpluses and those countries (just about all of them) which President Trump believes aren’t paying enough on defence. Also on the radar are the BRICS* nations, who Trump has promised to impose 100% tariffs on should they try and create a rival currency to the US Dollar. Leading politicians within the BRICS have already floated the idea of a rival currency.
*BRICS – is recognised as a group of emerging market countries and the acronym stands for Brazil, Russia, India, China, and South Africa. Originally the acronym was BRIC (as South Africa was not part of the founding members) and was coined in 2001 by a Goldman Sachs economist Jim O’Neill. On January 1st, 2024, Egypt, Ethiopia, Iran, and the United Arab Emirates joined BRICS, who also announced that their newest member is Saudi Arabia, but the United Kingdom has yet to put pen to paper so as yet have not officially joined
Over the last 24 years, BRICS has grown into what is effectively a world club comprising of ten member states, some of whom are major energy producers such as the United Aram Emirates, whilst others are recognised as the largest consumers amongst the emerging or developing economies. Many western commentators feel that BRICS, led by China, are an anti-western organisation and have ambitions to have their own currency moving away from global reliance on the US Dollar.
Many experts feel that President Trump will stay true to his word and invoke tariffs on many countries, including America’s allies. He is especially adamant about those countries he feels will do the United States harm and he has named Brazil, India, and China in that bracket. How far the President will go with tariffs we will have to wait and see, but with China upending the Artificial Intelligence sector, it looks like certain countries are in for a bumpy ride.