Goldman Sachs: Trading Desk 01/27/2025
S&P -146bps closing at 6012 on MOC volume of $575M for SELL. NDX -297bps at 21127,
R2K -106bps at 2283 and Dow +65bps at 44713. 17.19B shares traded across all US exchanges vs. YTD daily average of 16B shares. VIX +2054bps at 17.90,
Oil -217bps at 73.04, US 10Y Bond -9bps at 4.52, Gold -97bps at 2743, Dollar Index (DXY) -5bps at 107.39 and Bitcoin -224bps at 102219.
Shares fell sharply with significant pressure on the global AI complex due to competition concerns coming from Deepseek, a Chinese AI startup that has reportedly demonstrated AI models with comparable performance to the best AI chatbots at a fraction of the cost. This is relevant because it calls into question the widely held belief that the future of AI will require ever-increasing amounts of computing power, energy, and resources to develop.
So far, the market has rewarded companies that spend on AI (like AMZN, MSFT, GOOGL, OpenAI, etc.) and those that provide the necessary tools (like NVDA, AVGO, VRT, and semiconductors in general), accumulating a significant amount of capital and market valuation in both sectors. This news is shaking investor confidence across the ecosystem, primarily because the purported low cost of Deepseek’s model calls into question the need for the same type of spending/investment in the future. (Credit: Peter Bartlett)
Breadth was healthy with rotational forces into defensive sectors (index construction matters on declines as well as on gains). 350 S&P names closed UP on the day (S&P Equal Weight +2 basis points), while NVDA fell 17% and pierced its 200-day moving average for the first time in over two years. AI Semiconductors (GSCBSMHX) fell 12%, its worst day since the COVID pandemic; AI (GSTMTAIP) fell 9%, a move of 6 standard deviations; Power Up America (GSENPOW) fell 14%, a move of 7 standard deviations; Hedge Funds VIP vs VIP Short (GSTHVIPP) fell 4%, a move of 6 standard deviations; and High Beta Momentum (GSPRHIMO) fell 9%, a move of 5 standard deviations.
Our floor was at a level 7 on a scale of 1-10 in terms of overall activity. Total executed flow ended at -438 basis points versus a 30-day average of -44 basis points. Not surprisingly, our desk was heavily weighted toward selling after a combination of institutional managers reducing risk and shorts pushing in semiconductors, with the vast majority of the supply early in the session. Overall, institutional managers ended up being net sellers of approximately $2.5 billion, while hedge funds were barely selling, which makes sense considering last week’s nominal gross divestment (long selling and short covering combined) was the largest in our prime brokerage book in 6 months.
An intraday flash of the prime brokerage showed that the performance of long/short strategies was holding: fundamental L/S strategies fell 70 basis points due to beta, while quantitative strategies rose (more details on this tomorrow).
On a positive note, today marked the first day of the S&P 500's open repurchase window. We estimate this window will be open from today through March 14. Our flows last week were light as we were still coming out of the blackout period. We expect to see increased flows in February now that we are in an open period.
Beyond this episode with Deepseek, this week was set to be very busy: Bank of Canada decision (Wednesday morning; 25bp rate cut expected), FOMC decision (Wednesday afternoon; no rate change expected), ECB decision (Thursday morning; 25bp cut expected), US Q4 GDP, US December PCE index, and US Q4 labor cost index (Friday morning). RFK Jr. hearing is scheduled for January 29th with Gabbard on January 30th. On the micro front, 41% of the S&P market cap will report earnings, including 4 of the Mag7 names (TSLA, MSFT, META on Wednesday, and AAPL on Thursday).