DeepSeek’s Ripple Effect Triggers Market Volatility Amidst Holiday Trading Lull
The global financial markets experienced a turbulent pre-holiday trading session, marked by mixed performance across Asian equities. While several markets remained closed for regional holidays, including Australia, Indonesia, South Korea, and Taiwan, the open markets grappled with the reverberations of DeepSeek AI’s emergence. The impact was particularly pronounced in the technology and hardware sectors, with semiconductor companies bearing the brunt of the sell-off. Mainland China and Hong Kong-listed semiconductor manufacturers witnessed significant declines, mirroring a broader global trend of reassessing technology valuations in light of DeepSeek’s disruptive potential. This event has sparked discussions about the concentration risk within the S&P 500 and the global overweighting of U.S. stocks, prompting speculation about a potential resurgence of diversification strategies in 2025.
Mainland Chinese investors, facing a prolonged market closure until the following Wednesday, appeared particularly eager to liquidate holdings, potentially contributing to the downward pressure. Despite efforts by state-backed investment firms, often referred to as the "National Team," to stabilize the market through increased trading volumes in favored ETFs, the overall selling pressure proved overwhelming. This pre-holiday selling suggests investors sought to secure cash ahead of the extended break. Concurrently, the Chinese government announced a new electronics trade-in subsidy program, which spurred a remarkable surge in smartphone and smartwatch purchases. Within just four days, over 10.8 million devices were sold under the program, highlighting the robust consumer demand for electronics in the Chinese market.
Adding another layer of complexity to the market dynamics was the release of the "Action Plan for Promoting the High-quality Development of Index Investment in the Capital Market" by the China Securities Regulatory Commission (CSRC). However, the announcement seemingly had little immediate impact on market sentiment. Hong Kong-listed internet stocks presented a contrasting picture, with most companies registering gains. Industry giants like Tencent, Alibaba, Baidu, and JD.com all saw their share prices rise, bucking the broader market trend. This positive performance may be attributed to ongoing optimism surrounding the growth potential of China’s digital economy. Underscoring the continued interest in Hong Kong equities, Mainland investors channeled a substantial $1.17 billion into Hong Kong-listed stocks and ETFs via the Southbound Stock Connect program.
China’s latest economic data, as reflected in the January Purchasing Managers’ Index (PMI) readings, painted a less optimistic picture. Both the manufacturing and non-manufacturing PMIs fell short of expectations, signaling a potential slowdown in economic activity. The manufacturing PMI dipped below the crucial 50-point mark, indicating contraction in the sector. This weaker-than-anticipated performance raises questions about the sustainability of China’s economic recovery in the face of global headwinds and ongoing trade tensions. Meanwhile, there are indications of potential progress in U.S.-China trade negotiations. The recent suspension of soybean imports from several Brazilian firms by Chinese authorities has fueled speculation about a possible increase in U.S. agricultural purchases by China. This, coupled with potential orders for Boeing airplanes, could signal a concerted effort to rebalance trade relations and address the existing trade imbalance.
A deeper dive into the Hong Kong market reveals sector-specific trends. While the Hang Seng and Hang Seng Tech indexes closed in positive territory, trading volumes were significantly lower than the previous session, albeit still above the one-year average. The market displayed a preference for growth stocks and small-cap companies, which outperformed their value and large-cap counterparts. Utilities and Real Estate emerged as the top-performing sectors, while Information Technology lagged behind. Within subsectors, media, consumer durables, and paper & packaging led the gains, whereas semiconductors, electrical equipment, and technology hardware experienced declines. The Southbound Stock Connect program witnessed robust activity, with Mainland investors predominantly buying Hong Kong Tracker ETF, Tencent, ZTE, Xiaomi, Meituan, and Alibaba, while selling SMIC and Kingsoft Cloud.
Mainland China’s stock markets, on the other hand, ended the day mostly in negative territory. The Shanghai, Shenzhen, and STAR Board all recorded declines, with technology and real estate sectors bearing the brunt of the sell-off. Similar to the Hong Kong market, growth stocks and small-cap companies underperformed compared to value and large-cap stocks. Utilities and Energy were the best-performing sectors, while Information Technology suffered the most significant losses. Within subsectors, motorcycles, ports, and power equipment fared well, while communication equipment, electronic components, and power generation equipment lagged. Northbound Stock Connect volumes remained relatively subdued. The Chinese yuan and the Asia Dollar Index weakened against the U.S. dollar, while Treasury bonds rallied, and copper and steel prices rose. These market movements reflect the complex interplay of global economic factors and ongoing uncertainties surrounding trade and geopolitical developments.
