To The Moon

By Samuel Indyk

LONDON, Jan 27 (Reuters) - U.S. stocks were headed for a sharp drop 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 - yen and Swiss franc - surging.

DeepSeek, which overtook rival ChatGPT to become the top-rated free application on Apple's App Store in the United States, 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 centres.

Futures on the tech-heavy Nasdaq 100 NQcv1 tumbled 3.5% and S&P 500 futures EScv1 declined 2.1%.

The CBOE Volatility Index .VIX, known as Wall Street's "fear gauge", hit its highest since Dec.20, and was last up 6.3 points at 21.19.

Shares of AI-bellwether Nvidia NVDA.O, which have risen over 800% since the start of 2023, were down more than 11% in pre-market trade.

In Europe, the technology sector led the pan-European STOXX 600 index .STOXX 0.4% lower, while the blue-chip Euro STOXX 50 .STOXX50E dropped 1%.

The STOXX Europe 600 technology index .SX8P fell 4.4%, its biggest one-day drop since mid-October.

"China and DeepSeek say, at the very least, that they can deliver what ChatGPT can deliver today at a fraction of the cost," said George Lagarias, investment strategist at Forvis Mazars.

"It makes sense that markets question the narrative that has been underpinning the whole market ... It's a very frothy market so it doesn't really take that much for investors to take some profit."

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 8.5 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 1.2% against the yen JPY=EBS and 0.9% 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 U.S. 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 more than 1% 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 1.2% 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.

Monday's market volatility 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.

Brent crude futures LCOc1 fell 45 cents, or 0.6%, to $78.06 a barrel. U.S. West Texas Intermediate crude CLc1 was at $74.24, down 42 cents, or 0.6%.

Gold XAU= fell 0.5% to $2,755 per ounce.

Leading cryptocurrency bitcoin BTC= slumped more than 4%, dropping below $100,000 for the first time in a week, before bouncing to trade at $100,500.

(Reporting by Samuel IndykEditing by Christina Fincher)

((Samuel.Indyk@thomsonreuters.com))