By Jan Faure
January was a turbulent month for global markets. Despite lingering concerns over tariffs, optimism surrounding Trump’s economic policies, resilient corporate earnings and a buoyant economic outlook boosted investor confidence. The month had however started on the back foot after stronger than expected US economic data revived inflation concerns and with it tighter monetary conditions.
DeepSeek, a Chinese AI startup, released its open-source R1 model, which was developed at a fraction of the cost of other cutting-edge large language models. Technology companies plunged in the aftermath as investors feared the AI investment case may be significantly overstated. DeepSeek is seen as a potential disruptor to the AI supply chain, affecting semiconductor firms and data centres.
Much of the stellar performance of the “Magnificent Seven” stocks (over a third of the S&P 500's market cap) over the last few years has been the expectation that the AI revolution will deliver huge profits for investors. This was temporarily (although the jury is still out) brought into question. Nvidia, for example, lost $593 billion (17%) in market cap in a single trading day, the largest one-day loss in history. For the month though, the tech-heavy NASDAQ Composite still managed a 1.6% gain while the S&P 500 added 2.7%.
The US Federal Reserve (Fed) held interest rates steady at its January policy meeting, in line with expectations, and acknowledged that inflation remains “somewhat elevated.” Fed Chair Jerome Powell said the Fed is not in a hurry to lower interest rates, and that it paused cuts to see further progress on inflation. Policymakers noted that recent indicators suggest that economic activity has continued to expand at a steady pace, while labour market conditions remain stable at strong levels.
The Fed’s ability to cuts interest rates in 2025 has narrowed due to a robust US economy coupled with Trump’s inflationary economic policies. These policies include tariffs (will push up domestic prices), restricting immigration (will create upside wage pressures) and tax cuts (will likely boost domestic demand).
The UK’s FTSE 100 index gained 6.1% to hit a record high, while at the same time posting its best month in over two years. UK equities were aided by sterling weakness and relatively inexpensive company valuations (FTSE 100 forward price-to-earnings multiple is half the S&P 500). The UK’s dominant banking, mining, and energy sectors have so far performed well in the new Trump era.
In Europe, the Euro Stoxx 50 index advanced 8.0% for the month. The European Central Bank (ECB) lowered interest rates for the fifth time since June, reducing the deposit rate by 25 basis points to 2.75%. The cut reflects the ECB’s updated inflation outlook, with price pressures easing in line with projections. The ECB signalled that more loosening is in the pipeline, creating a supportive monetary setting for economic growth in the Eurozone.
Japan’s Nikkei 225 index dropped 0.8% for the month. The Bank of Japan (BoJ) raised its short-term interest rate by 0.25% to 0.50%, the highest level since 2008, in line with market consensus. This rate hike is in response to strong wage growth and progress in inflation, signalling the BoJ's confidence in the economy's recovery.
The month of February got underway with news of a 25% tariff on goods imported into the US from Mexico and Canada, with 10% to be levied on China. The three countries are America’s biggest trade partners. Canada and Mexico immediately announced retaliatory tariffs, while China said it was considering countermeasures and plans to file a lawsuit with the World Trade Organization. Tariffs are unquestionably inflationary and would likely detract from global growth. As of writing, tariffs have been suspended for a month. This is high stakes brinkmanship at its best.
While the election of Donald Trump (and a Republican clean sweep) is expected to bring a growth focused “America First” political agenda (positive for the US economy and corporate earnings) there are concerns over the impact that trade wars will have on growth and inflation worldwide. It will likely keep bond yields elevated and negatively impact broader equity markets and riskier assets. That said, Trump is certainly using them as a negotiating tool and the hope is that common sense prevails.
Table 1: Global Indicators – Local reporting currencies
