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Seeking deeper for cheaper

4 Feb 2025 | 3 minutes to read

A good week for

  • UK & Japanese equities, which each advanced 2.0% (sterling terms)
  • Sterling fixed interest – UK government bonds, index-lined bonds and corporate bonds added 0.9%, 1.0% and 0.9% respectively

A bad week for  

  • US equities, which declined -0.9% in nominal terms and -0.7% in sterling terms
  • Brent crude oil, which slipped a further -2.2% in dollar terms

A Deep blow for US AI?

The release of a new Chinese Artificial Intelligence (AI) powered chatbot app, DeepSeek, led to significant volatility in US technology sector stocks last week, as it quickly overtook OpenAI’s ChatGPT as the most-downloaded free iOS app. DeepSeek, claims to have built an AI model for approximately $5.6m using Nvidia chips - a cost efficiency which, if true, represents a huge forward step in AI development. Comparable costs for the latest Chat GPT model were c.$100m. Shortly after the announcement the Nvidia’s market value fell almost $600m, although the stock later rebounded somewhat. OpenAI raised concerns about intellectual property violations, claiming that DeepSeek may have “inappropriately” used data from its model to develop their chatbot.

DeepSeek’s low-cost model raises questions about the competitive advantage and future earnings potential AI exposed US tech stocks were assumed to have. However, there are reasons to doubt the veracity of the shoestring budget claims, and worth noting that the DeepSeek model does not appear sufficiently accurate for widespread commercial use.

US equity markets recovered some losses over the latter part of last week, as positive earnings reports and a strong US GDP print (2.8% growth for 2024) boosted sentiment once again. Apple, Microsoft and Meta announced better performance than expected, and while Tesla’s earnings fell short of expectations, its share price rallied on optimism about its production pipeline. Overall, S&P 500 earnings are expected to rise by approximately 12% this quarter, with the positive momentum driven by favourable US economic conditions and an expected deregulation drive by the US government.

Reeves looks to pave the way to growth

UK Chancellor, Rachel Reeves, announced plans for several major infrastructure projects last week, which she hopes will boost economic growth in conjunction with other policy initiatives. In an effort to underline her commitment to a pro-growth approach, Reeves also urged regulators to remove barriers to growth and create an environment that fosters investment and innovation. The government hopes to significantly reduce red tape, though many infrastructure projects still require formal planning approval, and it may be years before construction can actually begin in some cases.

Reeves confirmed support for the much debated third runway at Heathrow. Although approved in 2018, the project has been delayed by legal challenges. Reeves invited Heathrow to submit updated plans by the end of the Summer, conditional on meeting environmental objectives. The government also backed expansions at London City and Stansted airports and promised decisions on the development of both Luton and Gatwick airports shortly. Additionally, there are plans to reopen Doncaster Sheffield airport as a regional hub.

Reeves also outlined plans to develop ‘Europe’s Silicon Valley’ between Oxford and Cambridge, leveraging the regions’ world-class universities and research capabilities. The continued construction of another long-discussed project, East West Rail, is expected to better link the two regions. Additionally, the government approved various other key infrastructure projects, including a £7.9bn investment for nine new reservoirs, and is seeking private finance for a lower Thames crossing linking Tilbury and Gravesend. In an attempt to further unlock growth potential, Reeves and Prime Minister Kier Starmer announced pension reforms which should give greater flexibility over how occupational defined benefit schemes are managed, potentially releasing ‘trapped’ surpluses from such schemes for investment in the broader UK economy.

US Federal Reserve

Federal Reserve (Fed) officials unanimously decided to keep interest rates unchanged at 4.5% last week, marking a pause after the rate setting Federal Open Markets Committee (FOMC) had cut rates at their previous three meetings. A pause in the monetary easing cycle was in line with expectations, as the Fed examines a potentially challenging political and economic backdrop. Whilst inflation has moved towards the Central Bank’s official 2% target, Fed Chair Jerome Powell reiterated that it nevertheless remained above target – with the Fed’s preferred inflation gauge actually showing headline inflation had ticked up to 2.4% in November - and that restrictive policy was therefore still necessary. Powell stated that the Fed would need to see “real progress on inflation or some weakness in the labour market before we consider making adjustments.” Markets are not currently anticipating another rate cut until June.

US President Trump has recently stated that he would “demand” interest rates be lowered if inflation came down as he expected, amid continued speculation that the new White House administration might threaten Fed independence. While no President has authority over the Fed outside of nominating board members, policymakers are likely to have to brace themselves for a more confrontational relationship with the government. Powell pointedly refused to comment on Trump’s public demands and is likely to want additional time to assess the potential impact of the President’s proposed policy agenda.

European Central Bank

The European Central Bank (ECB) announced a 25-basis point (bps) cut to interest rates last week, the fifth cut since the Bank embarked on a monetary cycle in June last year. The cut brings the ECB’s key deposit facility rate to 2.75%. The primary task for the ECB remains one of managing the competing issues of returning inflationary pressures and increasingly sluggish economic growth across the eurozone. Having fallen below the ECB’s 2% target last year, headline inflation re-accelerated to 2.4% in December, as the base effects from falling energy prices a year or more ago fall out of the equation. This comes against a backdrop of slowing growth, as preliminary data released last week suggested that the eurozone unexpectedly stagnated in the fourth quarter of 2024, with the trials and tribulations experienced by the governments of both France and Germany seemingly damaging business and consumer confidence. Expectations had been for the bloc to post GDP growth of 0.1%.

In other news

  • The US announced 25% import tariffs on goods from Canada and Mexico and a 10% tariff on goods from China over the weekend – although a month-long delay to Mexican tariffs was later confirmed.
  • The FTSE 100 enjoyed its best month in over two years in January, recording another record high. The move was in part driven by renewed expectations for interest rate cuts in 2025.
  • Donald Trump told reporters that Microsoft was in talks to acquire TikTok. Microsoft declined to comment.
  • India and China agreed to resume direct flights, after a near five-year hiatus, and to work to resolve differences over trade as relations continue to thaw.
  • US Secretary of State, Marco Rubio, demanded that Panama make changes to reduce Chinese “influence and control” over the Panama Canal, stating that the US would take steps to protect its rights under a treaty between the two countries if necessary.

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