Markets experienced a volatile week, driven largely by AI competition concerns after Chinese AI developer DeepSeek unveiled a new energy-efficient large language model. This triggered a sell-off in U.S. tech stocks, with NVIDIA plunging nearly 17% on Monday. Meanwhile, strong corporate earnings helped limit losses later in the week. Central banks also remained in focus, as the European Central Bank cut rates while the Federal Reserve held steady, reinforcing expectations for a slower easing cycle. In Europe, markets hit record highs, while Japan and China saw mixed performances.
U.S. Markets: AI Jitters Weigh on Markets, Earnings Offer Some Relief
The major U.S. indexes posted mixed results, with the S&P 500 and Nasdaq slipping 1% and 1.6%, respectively, while the Dow eked out a small gain. The week kicked off with a sharp tech-driven selloff after DeepSeek’s AI breakthrough sparked concerns about increased global competition. The news sent NVIDIA tumbling nearly 17% on Monday, dragging down other AI-related stocks and weighing on market sentiment. However, strong earnings reports, particularly from Meta and Apple, helped offset some of the losses, allowing markets to recover later in the week.
Key drivers:
Earnings Season: With nearly 40% of the S&P 500's market cap reporting, earnings remained strong. Meta and Apple exceeded expectations, helping the market rebound. Fourth-quarter earnings growth is now tracking at 13.2%, the fastest in three years.
Tariff Concerns: Political risks resurfaced as President Trump reaffirmed plans for 25% tariffs on Mexico and Canada by February 1, along with a new 10% tariff on Chinese goods. This dampened investor sentiment after prior hopes of a softer stance on trade.
Federal Reserve Decision: The Fed left rates unchanged at 4.25%–4.50%. Chair Jerome Powell signaled no rush to cut rates, citing “somewhat elevated” inflation.
Economic Data: Core PCE inflation held steady at 2.8% in December, remaining above the Fed’s 2% target. GDP growth came in at 2.3% for Q4 and 2.8% for the full year, slightly below expectations but still solid.
Europe: ECB Delivers Cut, Markets Hit Record Highs
The STOXX Europe 600 climbed 1.78% to a record high, with Germany’s DAX (+1.58%) and the UK’s FTSE 100 (+2.02%) leading gains. The pound weakened, boosting UK equities as multinational companies benefited from currency translation effects.
Key themes:
ECB Rate Cut: The European Central Bank (ECB) cut interest rates by 25 basis points to 2.75%, citing progress in controlling inflation. However, ECB President Christine Lagarde stopped short of committing to further rate cuts, emphasizing a cautious approach.
Economic Growth: Eurozone GDP stagnated in Q4, with contractions in Germany and France, while Spain’s economy expanded by 0.8%.
Inflation Trends: Inflation slowed in Germany and France but ticked up in Spain.
Housing Market: The Bank of England (BoE) reported stronger-than-expected mortgage approvals in December, reaching 66,526, the highest since September 2022, suggesting housing demand is stabilizing despite high borrowing costs.
Japan: AI Fears and BoJ Tightening Weigh on Markets
The Nikkei 225 fell 0.90% as Japan’s semiconductor stocks slid following DeepSeek’s AI announcement. However, the broader TOPIX index gained 1.37%, supported by strength in financials.
Key themes:
Monetary Policy: The Bank of Japan (BoJ) reiterated its plan to gradually raise interest rates, reinforcing expectations for continued tightening.
Currency and Yields: The yen strengthened to 154 per U.S. dollar, while 10-year Japanese government bond (JGB) yields held near a 14-year high at 1.23%.
Inflation Data: Tokyo’s core CPI rose 2.5% in January, supporting expectations for further BoJ rate hikes. However, a slowing economic backdrop may temper the pace of tightening.
China: Lunar New Year Pause, Weak Data Weighs on Sentiment
Mainland Chinese markets closed early for the Lunar New Year holiday, with the CSI 300 and Shanghai Composite slipping slightly before the break. Hong Kong’s Hang Seng Index posted modest gains in light trading.
Key themes:
Manufacturing Slowdown: China’s official manufacturing PMI fell to 49.1 in January, signaling contraction.
Industrial Profits: Declined for a third straight year, reflecting ongoing deflationary pressures and the lingering real estate downturn.
What to Watch This Week
United States
ISM Manufacturing PMI: This data will provide insight into the health of the U.S. industrial sector. After months of contraction, markets will watch for signs of stabilization as supply chains normalize and demand rebounds.
ISM Services PMI: The Fed closely monitors services inflation, so surprises in this report could impact interest rate expectations.
Job Market: After 256,000 jobs were added in December, economists expect moderate job gains in January. A cooling labor market could reinforce expectations that the Fed will cut rates later this year.
Eurozone & UK
Producer Prices: The Eurozone PPI will indicate whether input costs for businesses are rising or falling. Lower producer prices could reinforce expectations that consumer inflation will continue to moderate, influencing ECB policy expectations.
Bank of England Decision: The BoE is widely expected to keep rates at 5.25%, but markets will focus on any hints about future rate cuts. Governor Andrew Bailey’s press conference will be key in determining the timeline for policy easing.
Japan
Retail Sales: Data will show whether Japanese households continued spending despite economic uncertainties. Stronger sales growth could reinforce the BoJ’s case for further tightening, while weaker spending may signal deteriorating consumer confidence.
Household Spending: This broader measure of consumer activity beyond retail sales will provide insights into discretionary spending trends. Weak numbers could reinforce concerns about soft domestic demand.
China
Market Reopening: Mainland Chinese financial markets will resume trading after the Lunar New Year holiday (Jan. 28 – Feb. 4). Investors will assess market reactions to global developments, AI competition news, and domestic economic concerns.
Conclusion
This past week saw contrasting monetary policies, with the ECB cutting rates while the Fed remained on hold. AI competition spooked U.S. tech stocks, but strong earnings provided some relief. As markets prepare for upcoming economic reports and central bank decisions, investors will be closely monitoring inflation, job growth, and consumer spending data. Stay tuned for next week’s Market Roundup.
FAQs
Why did U.S. markets struggle last week?
AI competition concerns led to a sharp selloff in tech stocks, particularly NVIDIA, but strong earnings later in the week helped limit losses.Why did the ECB cut rates while the Fed held steady?
The ECB cited progress in controlling inflation, while the Fed remains cautious due to persistently high inflation in the U.S.How did AI developments impact global markets?
The launch of a new AI model from DeepSeek triggered concerns about increased competition, leading to a decline in U.S. semiconductor stocks.What is the outlook for Japan’s interest rates?
The Bank of Japan signaled continued tightening, but weaker economic growth may slow the pace of future rate hikes.What are the key reports to watch this week?
Investors should pay attention to U.S. PMI data, Eurozone producer prices, the BoE’s rate decision, and retail sales data from Japan.
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