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 US tech earnings this week. Over the weekend, attention were also focused on developments surrounding China’s new artificial intelligence (AI) model, DeepSeek, which seems to instil some concerns over US tech dominance and put these tech companies’ lofty valuation back under scrutiny.

DeepSeek, described as a cost-effective AI model utilising reduced-capability chips, has raised the spectre of disruption in the tech landscape, with its emergence suggesting that China can continue to make strides 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 are centred on whether US tech giants’ pricing power are being threatened and if their massive AI spending need re-evaluation.

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

Nikkei giving back gains on US tech weakness

A notable move we saw in the Nikkei last week is an 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, while 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 to watch around the 39,274 level.

China’s Purchasing Managers' Index (PMI) in focus ahead

On the economic front, China’s official PMI will be the key focus. Expectations are for manufacturing PMI to remain unchanged at 50.1, while services activities may ease slightly to 52.1 from the 52.2 prior. The data may likely reflect further stability in the recent run of China’s economic data lately, which saw the country hitting its target of “around 5%” growth for 2024. That said, any positive reaction to the economic data may still be limited, as investors will be looking towards the 1 February timeline laid out by US President Donald Trump on 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.