MARKET PULSE: END JANUARY 2025

DEEPSEEK HAVING A DEEP IMPACT ON THE ARTIFICIAL INTELLIGENCE PLAY


EQUITY MARKETS

The second part of January was by far more market-moving than the first. As investors settled after the festive period, Trump’s inauguration took centre stage, with investors keeping a close eye on any clues regarding potential policies that might impact markets. Trump loves headline-grabbing news, and this event was no exception. Just after the inauguration, he sat down in front of his supporters to sign various executive orders. The initial reaction from markets was that Trump would take a softer approach to trade tariffs than initially feared. This is a contentious view, given that it is still early days to determine the scale and scope of the overall tariff plan.

Towards the latter part of the month, a Chinese company named DeepSeek rattled markets with the publication of its literature relating to its open-source large language model, which rivals its U.S. counterpart, ChatGPT. Unlike ChatGPT, DeepSeek laid its information bare for public scrutiny and adopted a similar approach to other open-source large language models, such as Meta’s Llama. Fears of a cutback in capital expenditure and the potential of ‘doing more with less’ in terms of GPUs powered by Nvidia for large data centres, including AWS, Azure, and Google Data Centres, gained traction, leading to significant losses for semiconductor companies. The proof of concept that ChatGPT’s latest reasoning models can be developed more cheaply with similar computational ability still needs to withstand the test of time. Expectations lie firmly on the fact that development in this space will become more aggressive as regional players go head-to-head. Following the publication, the Nasdaq 100 fell by 3 per cent, with Nvidia dropping by 16.8 per cent, or $558 billion, in one day.

Samsung Electronics said that it expects limited earnings growth this quarter due to weak memory chip demand and U.S. export restrictions on AI semiconductors, with recovery anticipated in Q2 2025. The company is shifting focus to higher-margin AI server chips amid continued foundry business weakness. Apple’s quarterly revenue and profit slightly exceeded forecasts, driven by strong services and AI-enabled product growth, despite declining iPhone sales and an 11% revenue drop in China. The company expects modest revenue growth next quarter, with shares rising 3% in after-hours trading. Microsoft lost $200 billion in market value after its cloud division, including Azure, posted slower-than-expected growth despite a 157% rise in AI services revenue. Capacity constraints are expected to persist through 2025, impacting performance, though overall revenue and net income beat forecasts. Shares fell over 6% as the company ramps up AI infrastructure spending amid rising competition from China’s DeepSeek. Intel reported a 7% drop in Q4 revenue to $14.3 billion and a net loss of $126 million, missing profit expectations but beating sales forecasts. The company is undergoing a turnaround after the ousting of former CEO Pat Gelsinger, with cost-cutting measures showing early impact. Despite weak Q1 2025 forecasts, shares rose 2% in after-hours trading. OpenAI is in talks to raise up to $40 billion, with SoftBank potentially investing $15–$25 billion, pushing its valuation to $300 billion. The funding will support projects like Stargate, a $100 billion AI infrastructure initiative, where OpenAI will be the sole customer. This round positions OpenAI close to SpaceX’s $350 billion valuation, highlighting strong investor confidence despite rising competition from China’s DeepSeek.


SECTOR PERFORMANCE

Despite the prevailing market volatility induced by DeepSeek and changing fundamentals in AI-related developments within the software industry, the lower associated costs, coupled with strong earnings, enabled the communication services sector to outperform the S&P 500. META posted strong earnings results, leading to a 17.7 per cent gain throughout January, thereby driving sector performance. At the other end of the sectoral performance spectrum, information technology declined by 2.9 per cent, dragged down by Nvidia, Apple, Microsoft, Broadcom, and AMD.

Europe outperformed U.S. equity markets in January, with strong gains across all sectors, led by healthcare, financials, and information technology. Throughout January, the IT sector in Europe outperformed the IT sector in the U.S. by 11.3 per cent.


CENTRAL BANKING AND GEO-POLITICS

Central bank action continues to diverge within the developed world, as the Federal Reserve adopted a muted approach to its policy decisions, whilst the European Central Bank continued to cut rates in the face of a weakening economic backdrop. The potential for Trump tariffs, which could further disrupt supply chains, may complicate inflationary matters within the United States, as most economists maintain the view that price levels will be impacted, with costs passed on to end users. To this end, the Federal Reserve remains ‘on watch’ to assess the potential impact of these tariffs on the wider economy.

On the other hand, the European Central Bank is more concerned with core economies, such as Germany, which have been shrinking rather than growing, as sticky inflation remains a key issue. Higher-than-average electricity prices have dampened sentiment in the energy-intensive industrial nation, with challenges facing industries such as automobile manufacturing continuing to weigh on the country.

On the geopolitical front, Trump continues to dominate headlines, as the potential for tariffs on nations such as Canada, Mexico, China, and the European bloc remains a source of ongoing uncertainty for markets.


COMMODITIES

Commodities performed strongly during the month of January, with energy, industrial metals, and precious metals all delivering robust returns. Oil prices ended the month around the $80 mark for WTI Crude, as tighter sanctions on Russian and Iranian oil by the Biden administration, combined with colder-than-average temperatures, reduced potential supply. Copper had a strong run throughout the month, closing at $9,000 per metric tonne, driven by signals that Trump may be more willing to negotiate with China, which boosted interest in the metal. Iron ore also saw increased demand, with price factors remaining positive throughout the month. Gold maintained its stellar performance, recording a monthly gain of 6.6 per cent, following very strong returns in 2024 (+27%) and in 2023 (+13%).


CURRENCIES

The U.S. dollar remained stable during January following a strong performance in the final quarter of 2024. The robust economic backdrop of the U.S. economy remains pivotal for investor interest, as the combination of higher-than-normal interest rates and a strong U.S. consumer sets the tone for a fertile investment environment that continues to attract global attention.

Throughout January, the U.S. dollar strengthened against the Canadian dollar, gaining 1.08 per cent, as tariff risks imposed by Trump loomed over the country. The Japanese yen recovered some of its losses against the greenback, recording a monthly gain of 1.30 per cent. The British pound was mostly on the back foot in January against other major currencies, with the biggest declines registered against the Japanese yen and the New Zealand dollar, falling by 2.28 per cent and 1.70 per cent, respectively. It also dropped around 1 per cent against both the euro and the U.S. dollar.

The euro weakened against the Japanese yen, with a monthly decline of 1.22 per cent, while gaining traction against the Swiss franc, strengthening by around 0.50 per cent.


OVERALL

In conclusion, the month of January can be seen as the beginning of a Trump administration that promises to be controversial, confrontational, and focused on key promises made by Donald Trump during his campaign. The implementation of key economic policies by the Trump administration is likely to create a sense of uncertainty, which may translate into higher volatility and potentially impact risk-adjusted returns for investors. Whilst the U.S. remains an attractive investment space, investors should avoid being myopic and consider other global opportunities beyond the United States.

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ARIA Capital Management (Europe) Limited is authorised and regulated by the Malta Financial Services Authority, with Firm Reference number FEXS. A Limited Company registered in Malta No: C 26673. ARIA Private Clients is a trading name of ARIA Capital Management (Europe) Limited. Padraig O'Riordan and Paul Dee act as tied agents of ARIA Capital Management (Europe) Limited in Ireland.

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