Asia Day Ahead: China’s DeepSeek in focus

US equity futures started the week in the red

Volatility sets the tone to start the week as market participants reveal some hesitancy ahead of an onslaught of United States (US) tech earnings this week. Over the weekend, attention was also focused on developments surrounding China’s new artificial intelligence (AI) model, DeepSeek, which seems to raise concerns over US tech dominance and has brought these tech companies’ high valuations back under scrutiny.

DeepSeek, described as a cost-effective AI model utilising reduced-capability chips, raises the prospect of disruption in the tech landscape, suggesting that China can continue to advance in the AI race despite US restrictions. While it remains to be seen if DeepSeek will prove to be a viable, cheaper alternative in the long term, initial worries centre on whether US tech giants’ pricing power is being threatened and if their substantial AI spending needs re-evaluation.

The market reaction has been notable, with Nasdaq 100 futures sliding more than 1% at the time of writing. On the flip side, positive sentiment may emerge for Chinese tech companies such as Alibaba, Tencent, and Baidu. Meanwhile, Japan’s Nikkei 225 is trading 0.1% lower, while Australia and South Korea are off for holiday.

Nikkei giving back gains on US tech weakness

Last week, the Nikkei made a notable attempt to break out of its consolidation range at the 40,200 level despite the Bank of Japan (BoJ) raising its short-term interest rate by 25 basis points (bp) last week. The rate move was widely expected, hence offering little market surprise. It also signalled greater confidence around 'sustainable' inflation and strong wage growth ahead, which should support corporate earnings.

Guidance around the next rate hike seems more data-dependent, which could only come in the second half of this year, as Trump’s trade uncertainties may likely dominate in the first half.

Near-term market weakness has seen the index giving back some of its gains to start the week, but one may look for any formation of a higher low before a renewed move back above the 40,200 level. A 4.5% gain over the past week may call for some cool-off in light of US tech weakness, with near-term support around the 39,274 level.

Nikkei 225 daily chart

China’s PMI in focus ahead

On the economic front, China’s official purchasing managers' index (PMI) will be the key focus. Expectations are for manufacturing PMI to remain unchanged at 50.1, while services activity may ease slightly to 52.1 from 52.2 previously.

The data is likely to reflect further stability in China's recent economic performance, which saw the country achieving its growth target of 'around 5%' for 2024. That said, any positive reaction to the economic data may still be limited, as investors await US President Donald Trump's 1 February timeline for any tariff measures.

Market moves ahead will be very much headlines-driven, where any inaction after 1 February could bring a sea of relief in the likes of Trump’s 'Day One'. Broader risk-taking in Chinese equities may also be more measured for now, as we head into the long Chinese New Year break which could see market participants reduce their exposure.