The past week began with a bang as Microsoft, Oracle and SoftBank unveiled their ambitious Stargate AI infrastructure project, only to be swiftly overshadowed by Chinese startup DeepSeek releasing a large language model that challenged notions of U.S. tech dominance.

Markets were initially enthused by the Stargate announcement, with tech stocks rallying on hopes the $100 billion project would accelerate AI adoption. However, sentiment reversed sharply on Monday as news spread of DeepSeek's model, which reportedly rivals leading American LLMs in performance while running on lower-spec hardware.

The Nasdaq plunged 3% to start the week as investors slashed valuations for U.S. chipmakers like Nvidia and tech titans who have poured billions into AI R&D, now seen at risk of being leapfrogged. The sell-off raised deeper questions about America's assumed AI leadership and whether the sky-high capex of its tech giants was justified if scrappy international competitors could achieve similar feats at a fraction of the cost.

However, U.S. tech stocks rebounded on Tuesday, with the Nasdaq recovering over 2%, as markets digested the DeepSeek news. Investors are now anxiously awaiting earnings reports and guidance from Microsoft, IBM, Tesla and Apple for their assessment of the competitive landscape.

Central banks were also in the spotlight, with the Bank of Japan unexpectedly hiking rates by 25bps to 0.5% and signaling more to come - contrasting with rate cuts expected from the Bank of Canada and Sweden’s Riksbank on Wednesday. The Fed is seen staying put for now after its proactive cuts in 2024.

Preliminary Purchasing Managers' Index (PMI) readings painted a mixed picture, with Europe and the UK beating gloomy forecasts but still mired in manufacturing contraction, while U.S. services cooled a little faster than expected. 

In Australia, the Q4 CPI report showed a further moderation in trimmed mean inflation to 3.2% year-on-year from 3.5% prior. Core inflation is seen easing on lower housing and energy costs, potentially giving the RBA room to cut rates at the next meeting. The December NAB business survey showed a rebound in conditions but still-elevated price pressures and current market pricing indicates that there are expectations of just one cut in February or later in the year. The kind of rate cuts that would materially help home owners are unfortunately predicated on much worse economic news leaving Australian mortgagees stuck between a rock and a hard place for the foreseeable future.

On trade, markets are still deciphering President Trump's latest spate of tariff proposals targeting Canada, Mexico, Taiwan, Colombia and more, along with a potential gradual universal tariff scheme. While Trump appeared to somewhat soften his stance on China, the DeepSeek development might complicate things further.

In the week ahead, the outlook statements of U.S. tech companies reporting this week will be worth watching out for with a particular focus on the implications of DeepSeek's model on CAPEX intentions and margins.