TARIFF-IC!
Last week, some AI-related stocks were roiled on Monday after the release of a new model from DeepSeek, a Chinese tech company, that was significantly cheaper to train than American ones. Markets subsequently recovered some of these losses as focus turned to big tech earnings including positives from Meta (Facebook).
On the macro front, the Fed left policy unchanged while the ECB cuts rates further. Both banks are expected to ease policy in the coming months, which helped push bond yields lower.
This week, focus is set to be on US tariffs (additional 10%) on all Chinese imports effective today, with China retaliating with tariffs of 10%/15% on specific items. Mexico and Canada yesterday agreed a one-month delay in tariff implementation from America.
The US employment report (Friday) is the main datapoint while Eurozone activity data including retail sales (Thursday) may also be of note.
DeepSeek, a Chinese tech company, released a new model that was significantly cheaper to train than those developed by US companies. This led concerns that American tech companies could face significant challenges in profiting from AI implementation. The model, however, is open source so big tech companies could still benefit from it.
In the US, the Fed left its key rate unchanged at 4.25-4.50% with Chair Powell stating there was no "hurry" to cut rates. He also said that policy was "meaningfully restrictive", suggesting the rate could be cut later in 2025. Meanwhile, Q4 GDP rose by an annualised 2.3% q/q, supported by a robust 4.2% rise in consumption.
Eurozone Q4 GDP was unchanged from Q3 as an expansion in Spain (+0.8% q/q) was offset by mild contractions in Germany (-0.2%) and France (-0.1%). The ECB cut its deposit rate by 25bps to 2.75% and guided for further reductions as it expected inflation to move down to the 2% target later this year.
Stocks were mixed last week as the AI-related sell off and disappointing earnings guidance from the likes of Microsoft weighed on US stocks, though this was offset by more positive outlooks from Meta and Tesla. The S&P 500 down by 1.0% for the week.
AI bellwether Nvidia fell by 17% on Monday and only recovered some of the losses to finish the week down by 15.8%. Expectations of lower chip demand required by new AI models like DeepSeek's dampened sentiment. These models, however, may speed up the delivery, adoption and monetisation of AI products, so the wider AI theme and market held up reasonably well last week.
European stocks benefited from continued positive sentiment, aided by the ECB easing policy, with the Euro Stoxx 600 rising by 1.8%.
Bond yields fell (bond prices rise as yields fall) amid expectations of lower central bank policy rates later in the year. The 10-year US Treasury yield decreased by 7bps to 4.55% last week, while the equivalent German Bund was down by 11bps to 2.46%.
- Tue 4th US - Job openings and labour turnover survey (JOLTS), factory order
- Wed 5th US - ISM services
- Thu 6th US - Initial jobless claims • Eurozone - Retail sales • Germany - Manufacturing orders
- Fri 7th US - Employment report, consumer sentiment • Germany - Industrial production
This is intended as a general review of investment market conditions. It does not constitute investment advice and has not been prepared based on the financial needs or objectives of any particular person.