By Naomi Rovnick, Harry Robertson and Amanda Cooper
LONDON (Reuters) – In a week when AI chipmaker Nvidia suffered the biggest one-day loss of value on record and the Federal Reserve said it was in no hurry to cut rates again, a few gauges underscore markets’ vulnerability to big swings.
Investors and analysts said the sell-off in tech stocks this week, driven by the popularity of China’s DeepSeek AI model, highlights the market ructions that can occur when heavy speculation meets unexpected bad news.
Here are five signals that highlight some of the tensions simmering.
1/HEAVY BETTING
Despite Monday’s ructions investors remain bullish about U.S. tech and President Donald Trump’s plans for tax cuts and deregulation, heightening risks of market gyrations if this widespread consensus proves wrong.
Short-term speculators have in recent months taken on more debt to magnify their gains, with levels of so-called gross leverage among hedge funds that trade U.S. stocks hitting their highest since 2010 in January, Morgan Stanley data showed.
Citi’s equity positioning model, derived from futures contracts, shows traders are heavily betting on further gains for Wall Street’s tech-focused Nasdaq 100.
“Everyone is sort of piled in. They’re super optimistic,” GAM chief multi-asset strategist Julian Howard said.
These trends are making some long-term money managers nervous, with JPMorgan attributing part of Nvidia’s violent Jan. 27 drop to traditional asset managers selling out.
Kevin Thozet, investment committee member at Carmignac, said he had reduced exposure to U.S. tech stocks several days ago and added to positions that would profit if the Nasdaq fell, saying DeepSeek called U.S. tech-stock “exceptionalism” into question.
High-for-longer U.S. interest rates, he added, might prompt U.S. households, now heavily invested in stocks, to pull money out.
Analysis by the U.S. Office of Financial Research has also found strong correlations between retail investment in speculative assets, such as crypto-currencies and use of consumer credit, signaling last year’s rate cuts fueled market gains.
2/ PRICES ARE NOT RIGHT?
The highest bond yields in years could also dent stocks’ appeal as investors can now get returns of 4% or more on government debt.
One measure of the equity risk premium – the extra return investors can expect for stocks – dropped below zero in December for the first time since the aftermath of the dot-com bubble in 2002.
“When people talk about managing volatility amidst all this, one of the areas which does it really well is short-dated fixed income,” said GAM’s Howard.
3/ DOLLAR WOBBLE
Since the Nov. 5 U.S. election, traders have doubled the size of their bets that the dollar will rise.
They now hold net short positions – a bet on the value of something falling – in all other major currencies. This has only happened on rare occasions in the last 10 years, LSEG data shows.
Much of this positioning is predicated on the Fed cutting rates more slowly than elsewhere, and an assumption that tariffs and tax cuts spark higher inflation and government borrowing, meaning any change to that scenario could be problematic for the U.S. currency.
4/ HAVEN-HUNTING
High concentration in tech stocks has made portfolios vulnerable, analysts say, and a rush to alternatives, such as Japan’s yen and European credit, is another sign of fast-changing market dynamics.
As European shares have hit record highs, Bank of America data showed money has flowed into European credit funds for 23 consecutive weeks.
5/ EYE OF THE STORM?
The VIX, which measures how volatile traders expect the S&P 500 to become, is below its long-run average of about 20.
But it has spiked out of nowhere twice in the last six months, once in August when a surge in the yen wreaked global havoc and again in December when the Fed hinted it would slow the pace of rate cuts.
Rob Almeida, global investment strategist and portfolio Manager at MFS International, described markets as “fragile” and said Monday’s heavy stock selling may have been driven by “leverage that might be being unwound and isn’t being accounted for”.
(Reporting by Naomi Rovnick, Harry Robertson and Amanda Cooper; additional reporting by Dhara Ranasinghe and Alun John; Editing by Dhara Ranasinghe and Tomasz Janowski)
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