8 min readWeekly Recap
Corporate earnings and AI competition worries led U.S. stocks broadly lower following a volatile week. However, the Dow Jones industrial average managed to book its third straight week of gains, aided by the lack of tech stocks.
The tech-heavy Nasdaq saw a steep drop on Monday in response to the emergence of DeepSeek, a Chinese AI developer. DeepSeek unveiled its open-source large language model that requires less energy and processing power than other AI models, raising concerns over competition in the broader AI space. Nvidia fell almost 17% on Monday and ended the week 15% lower.
Meanwhile, earning season continued, with around 40% of the S&P 500 companies reporting results last week. Positive figures and upbeat forward guidance from some large-cap companies, including Matter and Apple, helped the mood, but Microsoft fell post-earnings.
The Federal Reserve left interest rates on hold at 4.25% to 4.5.5% as was widely expected, with policymakers noting solid growth and labor market conditions in the US, whilst inflation remains elevated. The Fed was clear that it was in no rush to cut rates until data showed it was necessary. US core PCE, the Fed’s preferred gauge for inflation on a three-month basis, eased to 2.2%, its lowest level since July. This and concerns surrounding Trump’s next moves helped gold (XAU/USD) reach a record level.
Trump tariffs
Over the weekend, President Trump announced 25% trade tariffs on Canada and Mexico and 10% on Chinese goods from Tuesday, sparking risk-off flows and vows of retaliation. The US dollar is charging higher against its major peers and the USD/CAD has fallen to its weakest level since 2003 and the euro to its lowest level since November 2022. Equities are tumbling on the open in Europe, with a similar for US futures.
The sharp escalation in trade tensions has fueled a flight to safe havens as uncertainty increases about everything from inflation to central bank policy. The markets believe that trade tariffs and a potential trade war could increase US inflationary pressures and keep US interest rates elevated, while these measures could be deflationary for other countries, which may need to cut rates faster.
Volatility is likely to be the name of the game, especially in the early part of the week, as the market waits for retaliation. Canada has responded with trade tariffs on the US, and China has yet to respond. A tit for tat response from China could provide further swings in the market.
Eurozone CPI (Monday)
Expectations are for headline inflation to hold steady at 2.4% YoY in line with the previous month. Meanwhile, core inflation is expected to ease to 2.6% from 2.7%. Eurozone inflation increased by 2.4% YoY in December and core inflation at 2.7% is still above the ECB’s target 2% level. However, ECB policymakers have said they are comfortable that inflation is falling towards the target of 2% by mid-2025. Adding to this confidence, German inflation unexpectedly cooled.
Signs that inflation is easing will add to ECB rate cut expectations, pulling EUR lower. The ECB cut rates by 25 basis points in January and is expected to cut rates again. Should Trump implement trade tariffs, the ECB may need to cut rates faster to support the economy.
EUR/USD has fallen sharply on trade tariff worries and could fall further if inflation cools by more than expected.
OPEC JMMC meeting (Monday)
The joint ministerial monitoring committee will convene on Monday. This is not an official policy-setting meeting, with the group only making recommendations to the policy-making body. The meeting comes against the backdrop of US Trump urging OPEC+ to lower oil prices, followed by communication with Saudi Arabia. Despite requests, OPEC intends to continue its plan of gradually increasing oil production from April owing to concerns over weak demand from China and ample supply from the US.
Oil will also be under the spotlight as Trump applied 10% tariffs on Canada’s energy products in the US. Crude oil makes around 1/4 of all US imports from Canada, worth around $100 billion in 2023.
BoE rate decision (Thursday)
The Bank of England is expected to cut interest rates by 25 basis points to 4.5%. The BoE cut rates twice last year in August and November, and just before Christmas, the MPC voted 6 to 3 to leave rates on hold owing to sticky service sector inflation.
However, there are signs that UK inflation is cooling after CPI unexpectedly eased to 2.5% in December, and service sector inflation, which the BoE has been watching closely, dropped more than expected to 4.4%. Wage growth remains a little bit sticky, although there are questions over the strength of the labor market going forward following the government’s October budget. Industry data suggests that hiring is going on hold and firms are cutting jobs following the employer’s hike in National Insurance contributions.
As a result, investment banks have recently increased their expectations for rate cuts by the BoE. The central bank itself sees several cuts this year, although the market has been less certain.
A rate cut is 92% priced in, so if the Bank of England does cut rates and adopts a more dovish stance, GBP/USD could weaken further.
US non-farm payroll (Friday)
The US jobs market proved resilient in December, adding 250,000 jobs well above the 160,000 forecasts, highlighting a resilient labor market. Meanwhile, the unemployment rate lowered to 4.1% from 4.2%.
Across the week, several data points including the ADP payrolls and the employment sub-component of the services PMI figures, will provide clues to the nonfarm payroll.
Expectations are for US NFP to add 170k hobs in January while the unemployment rate is expected to hold steady at 4.1%.
The data comes after the Fed left rates unchanged and said it was in no rush to cut interest rates until the data showed it was needed.
A stronger-than-expected US nonfarm payroll figure could lower Fed rate cut expectations and boost the USD while pulling gold and equities lower. Strong signs of weakness in the labor market could cause the market to bring forward rate cut expectations, boosting gold and stocks whilst weighing on the USD.
USD/JPY is hovering around 155. A strong US NFP report could lift the pair towards 157.40, while a weak report could see 155 support taken out.
US earnings
US season continues in full swing with numbers this week from more tech firms, including Alphabet and Amazon, as well as Disney on PepsiCo and AMD, among others. Analysts will be keen to hear how Alphabet and Amazon executives view AI spending strategies following the emergence of the low-cost AI model from Chinese startup DeepSeek, unveiled last week.
The Nasdaq 100 is starting the week sharply lower on trade worries. However, upbeat earnings could help restore confidence.
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