week ending 31st January 2025.

As shown in the accompanying table, it was generally a positive week for markets. In the US, however, stocks ended lower after what began as a volatile week. The tech sector took a hit early in the week after China’s DeepSeek unveiled an open-source AI model that reportedly uses significantly less energy and processing power than existing applications. The news triggered competitive concerns in the AI space, sending NVIDIA shares down nearly 17% on Monday. However, as stocks quickly recovered as investors digested the reaction may have been overdone, given the early-stage nature of DeepSeek’s technology and the strong market position of leading AI players.

Despite this, earnings season provided stocks with a boost later in the week, four of the “Magnificent Seven” reported earnings this week. Apple, Microsoft, and Meta exceeded expectations, while Tesla fell short. Apple’s revenue rose 4%, slightly beating estimates.

Also, this week, the Federal Reserve held interest rates steady at 4.25%–4.50%, as expected. Chair Jerome Powell signalled no urgency to adjust policy, emphasising the need for further inflation moderation or labour market weakness before considering rate cuts. On Friday, US core PCE inflation, a key inflation gauge for the Fed remained at 2.8% year-over-year in December, reinforcing the Fed’s cautious stance.

European stocks climbed this week, with investor sentiment lifted by strong earnings and the European Central Bank’s (ECB) decision to cut interest rates. The ECB lowered its key deposit rate by 25 basis points to 2.75%, its first cut in the current cycle. While lower rates support equities by reducing borrowing cost, President Christine Lagarde emphasised that policy remains restrictive and repeated much of the rhetoric of previous meeting and didn’t provide a timeline for further reductions. Economic data from the Eurozone painted a weaker picture. GDP growth flatlined in Q4 2024, falling short of expectations. Germany’s 0.2% contraction and France’s 0.1% decline weighed on the region, while Italy stagnated for the second straight quarter.

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In the UK, the FTSE 100 closed the week at a record high, capping off its best monthly gain since November 2022. A weaker pound helped support the index, which includes many multinationals benefiting from overseas revenue.

Over the weekend, President Trump announced that new tariffs would take effect next week, including a 25% duty on goods imported from Mexico and Canada, along with a 10% tariff on Chinese products. In retaliation, Canadian Prime Minister Justin Trudeau revealed plans to impose 25% tariffs on a range of American goods, from beer to household appliances. Mexico, too, vowed to act, considering both tariff and non-tariff measures to safeguard Mexico’s interests. Trump has warned that tariffs on Chinese goods could rise as high as 60% during his campaign, however he has settled on a much lower 10%. In response, China condemned the 10% tariffs, calling them a “serious violation” of World Trade Organization rules. Beijing has also indicated it will take countermeasures to protect its rights, though it has yet to clarify whether these will include new tariffs.

While Trump has not yet indicated his stance on tariffs for European Union goods, a European Commission spokesperson warned that the EU would respond firmly to any partner that imposes “unfair or arbitrary tariffs” on EU products.

It’s important to note that Trump’s tariffs are unlikely be a blanket rate across all goods and may signal the start of broader negotiation talks between the US and its key trading partners. As such, the imposition of these tariffs may not necessarily be a sign of long-term economic isolation but part of a broader effort to reshape global trade dynamics to better align with US interests.

Data wise next week, Chinese manufacturing PMI, Eurozone inflation and the Bank of England’s interest rate decision. US labour market data, such as non-farm payrolls and unemployment.

Kate Mimnagh, Portfolio Economist