Chinese start-up DeepSeek said it had created an AI chatbot that had the same functionality as ChatGPT in a move that was called a “Sputnik moment” for the tech industry. The announcement smashed US tech firms’ hubris that they were leaders in the field, having ploughed billions of dollars into AI. DeepSeek’s app is free to download, with the company saying it had cost only $6 million to develop.
Donald Trump slapped 25% tariffs on imports from Canada and Mexico (excluding Canadian energy) and a further 10% tariff on China as of 1 February, sparking retaliatory action from the countries involved. The news, which broke after European and Asian markets had closed on Friday, sparked inflationary fears in the US.
The Federal Reserve (Fed) kept rates on hold, saying it had paused its rate-cutting cycle, while the ECB reduced rates by 25 bps and indicated further cuts were likely.
UK
The FTSE 100 jumped 2.0% over the week, hitting a fresh record high.
AstraZeneca cancelled plans for a £450 million vaccine plant to be located near Liverpool, citing disagreements over state support.
US
The S&P 500 slid 0.1% over the week, while the Nasdaq lost 0.5% as shares of US AI-related firms plunged after DeepSeek’s announcement of a free AI app. Shares of NVIDIA tumbled 17% in one day, the largest daily drop for a stock on record.
The US economy grew 2.3% on an annualised basis in the fourth quarter of 2024 in a weaker than expected end to a year.
The Fed held interest rates at 4.25% to 4.5%, indicating it was now on pause, with Fed chair Jay Powell saying US policymakers “do not need to be in a hurry to adjust our policy stance”. The decision attracted sharp criticism from President Trump who is pressing central banks to lower rates.
The core PCE index, the Fed’s preferred measure of inflation, held steady at 2.8% in December.
The Bank of Canada cut rates by 25bps to 3%, flagging concerns that US tariffs from the US could push the Canadian economy into a recession.
In response to 25% US tariffs on Canadian exports, Canadian Prime Minister Justin Trudeau announced retaliatory tariffs of 25% on C$155bn (US$107bn) worth of American goods. He said the “far-reaching tariffs” would hit US beer, wine, bourbon, fruit, fruit juices, perfume, clothing, shoes, household appliances, sports equipment, lumber and plastics.
Apple beat quarterly earnings, despite falling iPhone sales. Microsoft disappointed investors with slower growth in its core business, Azure Cloud, despite exceeding market expectations for profit and revenue.
Europe
The Eurofirst 300 rose 1.7% over the week, closing at a record high, as investors rotated out of US tech stocks.
The European Central Bank (ECB) cut rates by 25 bps to 2.75% and said economic risks were “tilted to the downside”. Markets have priced in two or three more quarter-point cuts by the end of the year. Sweden’s central bank also cut rates.
Eurozone GDP was flat in the fourth quarter of 2024, missing forecasts of modest growth. German GDP shrank 0.2%, while France’s economy unexpectedly contracted by 0.1%. Italian growth was flat, while the Spanish economy expanded 0.8%. Following the data, traders increased bets that the ECB will cut rates four times this year.
Germany’s inflation rate dropped to 2.3% in January, down from 2.6% in December and below market expectations of 2.6%.
Shares of ASML rose after its CEO said the emergence of DeepSeek was “good news” for the semiconductor industry.
Japan
The Nikkei 225 dropped 0.9% over the week.
Bank of Japan Deputy Governor Ryozo Himino confirmed that the central bank plans to keep hiking rates if the economy and inflation align with expectations. Tokyo’s core inflation accelerated to an 11-month high of 2.5% in January, further supporting the hawkish outlook.
Pacific Basin ex Japan
Beijing responded to new 10% tariffs imposed by the US on Chinese exports, saying it will “take necessary countermeasures to defend its rights and interests” but did not provide any further details.
Emerging Markets
The MSCI EM Index rose 1.3% in USD terms over the week. Chinese markets were mostly shut for the Lunar New Year holidays.
Brazil raised rates by 100 bps to 13.25%. The bank indicated that another 100-bps hike should be expected in the March should inflationary pressures remain.
In response to 25% US tariffs on Mexican exports, Mexico announced it would impose retaliatory tariffs on US goods without specifying the size or the targets.
Bonds
US Treasuries were boosted by a flight to safety as tech stocks retreated. The yield on the 10-year US Treasury dropped 9 1 bps over the week to 4.52%. 2-year yields fell 4 bps to 4.21%.
The yield on the 10-year German Bund declined 11 bps to 2.46%, while 10-year UK Gilt yields fell 13 bps to 4.64%.
Commodities
Gold breached $2,800 an ounce for the first time on record amid concerns over US tariffs on imports.
