DeepSeek, the 6 million dollar man
So the first-month ends, in some ways, not the most eventful but maybe thought-provoking. So far, Trump got the benefit of the doubt from equity and bond markets at the start of his 2nd term. There are concerns his proposed policies will further fuel US inflation. Last week, we heard from Jerome Powell and his fellow members of the Monetary Policy Committee, who are managing interest rate expectations for the year ahead. According to the GDP data released on Friday, the US economy remains in good health. Over the weekend, Trump announced his first 25% tariffs on Canada and Mexico and 10% on China. At present, ahead of the opening of stock markets on Monday, this news looks like hitting European markets harder than US ones.
Global bond and equity markets remained focused on the hope that interest rates in Europe will continue to fall, the US economy will continue to hold up, and China will throw more money to stimulate its economy. Trump’s desire to weaken the dollar will support emerging markets, and the oil price will remain roughly where it is. Goldilocks is alive and well; for that scenario, stock investors are happy to pay over 20x forward earnings for US stocks. Who is to argue with them? Not selling stocks on racy multiples when interest rates were zero is understandable. Still, when the risk-free rate in the US is likely to remain above 4.5% for the foreseeable future, and don’t rule it going up rather than down, that’s a harder sell.
What about the threat of DeepSeek that hit the headlines and sent shudders through global stock markets at the start of the week? An unknown from China has managed to defy the likes of Alphabet, Microsoft, Meta, et al., who have spent billions with, I assume, some of the smartest minds in our times to build the next generation of technological advancement, only to be outwitted by a man with 6 million dollars. It seems all a bit too good to be true. The real impact of DeepSeek is to raise the possibility that what is seen as the natural order of things can be questioned.
Looking to the week ahead, some of the world’s leading companies will make more headlines when reporting their earnings. Market analysts will also closely watch upcoming US jobs data for signs of continued economic resilience. The recent jobs data has been volatile, to say the least. We also get the results of the monthly global Purchasing Manager Surveys; there is expected to be a slight uptick in the composite PMI for the UK economy.
The Bank of England’s rate-setting policy committee will meet this week and likely sanction a 25-basis-point cut in interest rates. February can be tricky for equities; don’t rule it out this month.