U.S.
U.S. markets experienced turbulence earlier this week as the S&P 500 and Nasdaq Composite fell sharply following reports that Chinese startup DeepSeek had developed a competitive artificial intelligence (AI) model at a fraction of Silicon Valley’s costs. On Monday, January 27, the Nasdaq Composite dropped 3.1%, while the S&P 500 declined 1.5%. Despite this pullback, the S&P 500 has gained over 3% for the month, while the tech-heavy Nasdaq Composite notched 2.2%.
DeepSeek’s emergence into the AI space triggered the broader market and Nvidia, saw its shares plummet 17% earlier this week, wiping out $600 billion in market value—a record one-day loss for any company. Other tech giants, including Microsoft, Alphabet, and Broadcom, also faced significant declines. In the bond market, two-year Treasury yields plunged below 4.2% for the first time in over a month, while 10-year yields fell below 4.5% for the first time this year. However, both yields edged higher early Tuesday as equity markets stabilised, led by a strong recovery in the tech sector.
Markets experienced high volatility, driven by geopolitical tensions, technology sector disruptions, and economic policy shifts under President Donald Trump’s second term. Cooling inflation data and solid bank earnings, which kicked off the earnings season, have fuelled hopes for further Federal Reserve rate cuts. However, markets do not anticipate another quarter-point rate reduction until midyear. Treasury yields have fluctuated as investors weigh the Fed’s next steps, with the 10-year yield dropping from 4.0% to 3.8% over the month.
Eurozone
The Eurozone economy showed resilience in January 2025, with key indicators suggesting a stabilisation of business activity. The Pan-European Stoxx 600 index climbed 6% this month, and the HCOB Flash Eurozone Composite PMI Output Index rose to 50.2, signalling modest expansion after several months of contraction. Growth was driven primarily by the services sector, which remained stable, while the manufacturing downturn showed signs of easing.
Germany and France, the region’s largest economies, posted mixed results. Germany’s private sector activity stabilised after six months of contraction, as services growth offset ongoing manufacturing weakness. Conversely, France’s services sector saw its sharpest contraction since November 2020, though overall private sector activity showed slight improvement.
Geopolitical tensions are also weighing on sentiment. President Trump’s call for NATO allies to increase defence spending to 5% of GDP and threats of tariffs on European goods have unsettled policymakers. Industries such as automotive manufacturing, a cornerstone of Germany’s economy, remain vulnerable to potential trade disruptions. Meanwhile, the Eurozone’s luxury goods sector has shown resilience, with companies like Burberry reporting positive momentum in their turnaround plans.
In December 2024, Eurozone annual inflation accelerated to 2.4%, aligned with both market expectations and the preliminary estimate. The ECB remains committed to a data-driven approach to monetary policy and is expected to announce a 25 basis point rate cut at its January 30 meeting. Markets anticipate further rate reductions throughout 2025, potentially bringing the deposit rate to 2% by year-end.
UK
The UK’s blue-chip FTSE 100 index surged 5% in January 2025, buoyed by strong performances in the energy and financial sectors, including BP and HSBC. However, concerns over fiscal stability have overshadowed this momentum, with UK government bond yields reaching their highest levels since 1998. The 10-year gilt yield now stands at 4.921%.
UK inflation eased slightly in December 2024, with the Consumer Prices Index (CPI) rising 2.5% year-on-year, down from 2.6% in November. While this provides some relief for households, the Bank of England (BoE) remains cautious. Policymakers are expected to consider a 25-basis-point rate cut at their February 6 meeting as they balance inflation management with economic support.
China
China’s economy remains under pressure in January 2025, as trade tensions and domestic challenges weigh on sentiment. The yuan depreciated 1.8% against the U.S. dollar, hitting a four-month low following President Trump’s announcement of a 10% tariff on Chinese imports, set to take effect on February 1. The Shanghai Composite Index gained 0.7% this month, supported by domestic policy measures to stabilise markets.
Producer price deflation deepened to -2.3% year-on-year in December 2024, reflecting weak industrial output and excess capacity in key sectors. Consumer price inflation remained sluggish, rising just 0.1% year-on-year, highlighting a lack of domestic demand momentum. In response, Beijing has announced additional fiscal stimulus, including expanded infrastructure investments and support for local governments. However, analysts remain sceptical about whether these measures will be sufficient to reignite growth.
Despite these challenges, DeepSeek’s success has been a bright spot for China. The AI firm has gained international recognition for its ability to develop advanced models at a fraction of Western costs. Premier Li Qiang praised the company as a symbol of China’s growing technological leadership. However, geopolitical tensions and potential regulatory hurdles in Western markets could limit its global expansion.
Japan
The Japanese Nikkei 225 Index lost 1.2% this month as of January 29. Strong performances in export-driven sectors such as technology and automotive provided some support, though global economic concerns tempered broader gains.
Core CPI inflation rose 3.0% year-on-year in December, exceeding the BoJ’s 2% target. Policymakers have signalled the possibility of further tightening if inflationary pressures persist. At the same time, the Japanese government has unveiled a ¥13.9 trillion stimulus package to support households facing rising living costs. Measures include subsidies for energy bills, direct payments to low-income families, and increased funding for public infrastructure projects. While these initiatives provide short-term relief, Japan’s public debt—now over 260% of GDP—raises concerns about long-term fiscal sustainability.
This month, the Bank of Japan (BoJ) implemented a 25-basis-point rate hike, raising its policy interest rate to 0.5%, the highest level in 17 years causing the Japanese Yen to strengthen and hit its highest against the US dollar to around ¥155 per dollar since hitting six month low on Jan 10.
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The views and opinions expressed should not be construed as investment or financial advice. The information contained is for educational purposes only.