Updates to U.S. market open
China's DeepSeek has investors questioning tech valuations
US, global shares tumble, led by tech sector
Broad risk-off mood grips markets; yen, Swiss franc gain
US bonds rise, pushing yields to multi-week lows
By Lawrence Delevingne, Samuel Indyk
BOSTON/LONDON, Jan 27 (Reuters) - U.S. stocks dropped sharply on Monday, led by technology shares, as surging interest in Chinese startup DeepSeek's low-cost artificial intelligence model raised doubts over the sector's lofty valuations.
Tumbling global equities prompted a widespread flight to safety, with U.S. government bonds rising and safe-haven currencies - the yen and Swiss franc - surging.
DeepSeek, which overtook rival ChatGPT to become the top-rated free application on Apple's App Store in the U.S., says it uses lower-cost chips and less data, challenging a widespread bet in markets that AI will drive demand along a supply chain from chipmakers to data centers.
The Dow Jones Industrial Average .DJI fell 0.27%, to 44,305, the S&P 500 .SPX lost 1.72% to 5,996 and the Nasdaq Composite .IXIC fell around 3% to 19,342.
Nvidia < NVDA.O >, whose chips are the top choice for powering AI applications, dropped nearly 12% in early trading, while industry peers Broadcom < AVGO.O > and Marvell Technology < MRVL.O > fell more than 10% each.
The CBOE Volatility Index .VIX, known as Wall Street's "fear gauge", hit its highest level since Dec. 20, surging 33% on the day.
In Europe, the technology sector led the pan-European STOXX 600 index .STOXX 0.5% lower, while the STOXX Europe 600 technology index .SX8P fell 4.5%, marking its biggest one-day drop since mid-October.
"The catalyst of a foreign competitor to U.S.-led AI dominance begs other questions about trade and semiconductor chips and energy needs," Robert Savage, head of markets strategy and insights at BNY, wrote in a note on Monday. "The markets are unsettled, and volatility is higher after last week's strong returns."
BROAD RISK-OFF MOOD
The decline in global equity markets has driven risk-averse moves across other asset classes.
The benchmark U.S. 10-year yield US10YT=RR dropped 8.1 basis points (bps) to 4.54%, pushing the dollar lower. Safe-haven currencies have been the main beneficiaries.
"Haven demand has spilled over into FX," said Shaun Osborne, chief FX strategist at Scotiabank.
"Part of the dollar's slippage can be accounted for by the sharp fall in bond yields," Osborne added.
The dollar fell 1.1% against the yen JPY=EBS and 0.7% against the Swiss franc CHF=EBS, two currencies that often gain during periods of market unease.
The dollar index =USD, which measures the U.S. currency against six peers, fell 0.5% to its lowest level since Dec. 18.
U.S. import tariffs remain a key theme in markets, with President Donald Trump so far refraining from implementing broad trade levies.
China, Mexico and Canada are still facing a nervy wait after Trump last week earmarked Feb. 1 for additional tariffs on the country's top trading partners.
The U.S. dollar rose around 1.5% against the Mexican peso MXN= but was little changed against its Canadian counterpart CAD=D3 and the Chinese yuan in offshore trading CNH=D3.
The dollar also rose 1.65% against the Colombian peso COP= after a short-lived spat with the U.S. over deportations.
On Sunday, Trump threatened Colombia with tariffs and sanctions to punish it for refusing to accept military flights carrying deportees, but Colombia later said it would accept the military aircraft and the U.S. sanctions threat was put on hold.
The market volatility on Monday kicks off a busy week in which both the Federal Reserve and the European Central Bank meet to set interest rates.
In commodities, crude oil futures slipped after Trump called on Friday for the Organization of the Petroleum Exporting Countries (OPEC) to cut oil prices.
U.S. crude CLc1 was down 0.33% to $74.41 a barrel and Brent LCOc1 fell to $78.30 per barrel, down 0.25% on the day.
Gold XAU= fell 0.7% to $2,752 per ounce.
Leading cryptocurrency bitcoin BTC= slumped more than 3.6%, dropping below $100,000 for the first time in a week, before bouncing to trade at $101,276.
(Reporting by Lawrence Delevingne in Boston and Samuel Indyk in London; Additional reporting by Davide Barbuscia in New York: Editing by Christina Fincher and Paul Simao)
((Samuel.Indyk@thomsonreuters.com))
