DeepSeek Disrupts AI Dominance: Can US Tech Giants Hold Their Lead?
Digital Asset Market: Ondo Finance is expanding its tokenized real-world asset platform by bringing its $185 million U.S. Treasury token, OUSG, to the XRP Ledger network to enhance offerings for institutional investors. The OUSG token, backed by BlackRock’s USD Institutional Digital Liquidity Fund, allows for near-instant minting and redemption via Ripple's RLUSD stablecoin, with the launch expected within six months. Although specifics weren't disclosed, Ripple and Ondo Finance have made seed investments to ensure initial liquidity. OUSG, previously available on Ethereum, Polygon, and Solana, is now the second tokenized treasury product on XRP Ledger. The tokenization of real-world assets like U.S. Treasury notes is growing rapidly, enhancing liquidity and settlement efficiency compared to traditional finance methods. This development aligns with the trend of tokenized assets offering 24/7 intraday settlement, contributing to market stability.
Macro Economics: This week, mixed signals from President Donald Trump's administration regarding tariffs have confused markets and businesses. While Trump has set a deadline for implementing significant tariffs on Canada, Mexico, and China by February 1st, reports of a more gradual approach from Treasury Secretary Scott Bessent offered temporary relief. However, Trump contradicted this report, emphasizing a more aggressive tariff plan to protect the country. Businesses like General Motors are engaged in scenario planning. At the same time, economists warn that potential tariffs on Canada and Mexico could harm the US economy and potentially push the neighboring countries into recession. The confirmation hearing for commerce secretary nominee Howard Lutnick will be closely watched for further clarity on the trade agenda.
Equities: A cheaper AI model from China's DeepSeek triggered a sell-off in the S&P 500 and Nasdaq Composite yesterday. Due to concerns, it may challenge the earnings growth of US tech giants like Nvidia and Broadcom, which have driven the bull market. The financial markets have recovered since then, with Nvidia up 6% today. The DeepSeek AI uses less expensive chips and data, potentially impacting future sales for companies like Nvidia and questioning US dominance in AI. Big Tech's earnings have been pivotal to market gains, with companies such as Nvidia, Amazon, and Microsoft seeing significant estimates increases recently. Monday's market decline highlights investor anxiety over tech earnings sustainability. With only a small fraction of S&P 500 stocks outperforming in 2023 and 2024, experts like Richard Bernstein suggest a shift back to broader, more balanced markets could occur by 2025, moving away from the concentrated leadership of a few tech giants.
The Fed and US Treasury: Consumer stress has escalated, with a rising share of credit card holders making only minimum payments as inflation remains high and delinquencies increase. The Philadelphia Federal Reserve report indicates minimum payments are at a 12-year high, with delinquency rates also climbing, though still below the 2008-09 crisis levels. Inflation-adjusted consumer spending has risen, supported by consumer confidence, despite challenges such as increased average credit card rates, which have soared to 21.5%, and elevated balances. Last year, the Fed's rate cut did not alleviate credit card costs, contributing to the financial strain on consumers. The New York Fed survey suggests a heightened risk of missing debt payments. Additionally, high mortgage rates have dampened refinancing interest and contributed to a slowdown in mortgage originations, further stretching household finances amidst rising debt-to-income ratios.
Geopolitical: The newly formalized strategic partnership between Russia and Iran highlights a significant shift in global geopolitics, marking years of growing cooperation as both nations confront increasing Western sanctions. This alliance signifies their commitment to maintaining regional influence, enhancing economic resilience, and challenging Western dominance, illustrating a broader trend toward a multipolar world with emerging power centers. Although the treaty strengthens existing ties, it stops short of establishing a full military alliance. This partnership unfolds against a complex geopolitical landscape, particularly in the Caucasus, Central Asia, and the Middle East. In the Caucasus, Russia and Iran aim to counterbalance Turkey's rising influence following Azerbaijan's 2023 victory in Nagorno-Karabakh, which altered the regional power dynamics by diminishing Armenia's traditional dependence on Russia. Consequently, Yerevan is seeking closer diplomatic and economic relationships with the West. Thus, Russia, once the predominant regional player, faces challenges in retaining its influence as Armenia questions its role as the primary security guarantor amid an increasingly assertive Azerbaijan and growing Western engagement.
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Bitcoin briefly dipped below $100,000 on Monday, influenced by a broader tech selloff sparked by Chinese startup DeepSeek's announcement of cheaper AI models. Although the drop wasn’t directly tied to DeepSeek, bitcoin’s strong correlation with tech stocks, particularly the Nasdaq Composite, has kept trading in sync with the tech sector. This highlights an ongoing challenge for Bitcoin as a store of value: its six-month rolling correlation with the Nasdaq Composite has reached its highest point since March 2023, underscoring its vulnerability to movements in equity markets.
While President Trump has hinted at the possibility of a strategic bitcoin reserve, concrete actions to support the crypto market remain absent, leaving many investors in wait-and-see mode. Optimism remains for potential bullish developments in the months ahead, but significant breakthroughs are unlikely early this year. For now, bitcoin's price movement will likely continue to reflect broader market trends rather than acting as an independent hedge or safe haven.
Meanwhile, DeepSeek has captured investor attention, sparking debate over global AI competition. While companies like Nvidia and OpenAI have dismissed the immediate impact of DeepSeek’s announcement, it has raised important questions about the infrastructure and computing power required to meet growing AI demands. Additionally, concerns about the U.S. potentially losing its AI edge to China are emerging. Although U.S. companies hold advantages in chip technology and capital spending, they face challenges from a complex regulatory landscape. It’s too early to predict outcomes, but the competition between the U.S. and China in AI will remain a focal point for markets and geopolitics.
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