Tech stocks, and the broader equity indices, fell sharply on Monday. Progress made by Chinese artificial intelligence start-up DeepSeek has raised concerns about US leadership in the sector. DeepSeek claims its AI model achieves comparable results than its US competitors at a fraction of the cost. US firms currently spend billions of dollars on AI-related investments. In the meantime, due to trade restrictions on US chips exports to China, DeepSeek has developed a model that runs with less advanced (and recent) chips from Nvidia.
While this could create volatility, we don’t think this development poses a major threat to the broader tech sectors. US companies (and those elsewhere) will continue investing in AI as the range of application broadens. Meta’s CEO reaffirmed his firm’s commitment to spend around USD65bn on AI infrastructure in 2025. In addition, these companies could even spend more as the foreign competition intensifies. Over the long run, though, investment could naturally decrease. As has been the case for the semiconductor industry, production costs are likely to decrease; costs halved every two years. This should permit better and more targeted investments, and further advancements in the sector.
The short answer is no. Donald Trump did sign a flurry of executive orders on his inauguration day. But most of them were to roll back many of the policies Joe Biden implemented, primarily on climate and immigration. Launching drilling and mining initiatives and curbing illegal immigration was a way to put forward the ‘Trump agenda’.
Yet, Trump’s first day (and week) went without announcing the tariffs that he had earlier threatened to impose on his first day in office. This sent the US dollar and US Treasury yields lower, while equities rose. Equities were also bolstered by the creation of a large AI infrastructure project, Stargate, although its funding remains unclear. In addition, oil prices came under pressure, with the expectation of more supply, and due to Trump’s virtual address at the World Economic Forum in Davos, where he called for lower oil prices (and lower interest rates).
For now, we continue to expect economic resilience in the US, and globally, albeit at a softer pace compared to 2024. With inflation largely under control, we expect most central banks to continue cutting rates in 2025. As such, we maintain our US overweight over bonds, with a preference for US equities.
Last week, the Bank of Japan (BoJ) increased interest rates to 0.5%. In July 2024, an unexpected 25 basis-point rate hike from the BoJ triggered a painful bout of global market volatility. The market’s setback was cushioned in our portfolios thanks to the ‘insurance instrument’ we hold. This time, however, investors were anticipating the BoJ’s decision, and so market didn’t react much.
The BoJ’s is showing more confidence in the Japanese economy and has revised its forecasts for inflation to be higher throughout 2026. This brings the prospect of additional increases in rates in 2025. Inflation jumped to 3.6% in December, well above the 2% target, which supports this view alongside expectations of strong wage negotiations in the spring. That said, we think the BoJ is unlikely to bring interest rates much higher (maximum 1%) due to high level of interest rate expenses to service a very high government debt. In 2024, the cost of servicing debt represented 25% of what the government planned to spend in its budget, up from 22% the year before.
We remain neutral on Japanese equities given the volatility in the exchange rate, which has a significant impact of the performance of equities.
There are important central bank meetings this week. On Wednesday, we’ll focus on the US Federal Reserve’s (Fed) communication. We do not expect any rate cut this time around. The Fed preferred core inflation metrics (PCE) may have edged up slightly in December (Friday), and we expect the Fed will likely resume cutting rates around mid-year. That said, it will be interesting to hear what the Fed has to say after Trump pressured the central bank to lower interest rates. We don’t think the central bank’s independence is at risk. But we could see increased speculation about a potential change at the helm of the Fed before the end of Chair Jerome Powell’s term in May 2026.
On Thursday, we think the European Central Bank will bring down the deposit rate to 2.75% from 3%, given softer growth and inflation dynamics. We expect the release of GDP growth data for the last quarter of 2024 in US and the Eurozone (Thursday) to show a further divergence in growth trends across the regions.
In the Far East, the focus in China will be on several PMI releases (Monday and Friday). The Chinese economy is growing slowly, waiting for the promised government support to kick in.
