Highlights

• DeepSeek: A Potential DeepTrouble for NVIDIA?
• Tariffs and the Strengthening U.S. Dollar

US Markets

The year began on a positive note for equity investors, with U.S. markets benefiting from renewed optimism following President Trump’s return to the White House. His pro-business policy agenda, including promises of deregulation and tax cuts, bolstered investor sentiment. However, market dynamics shifted later in the month with the emergence of Chinese artificial intelligence (AI) company DeepSeek. By developing a highly efficient AI model that outperforms ChatGPT in key areas like scientific and math queries—while using lower-cost hardware and less data—DeepSeek has disrupted the AI landscape. This raised concerns about the U.S. technology sector’s ability to maintain its competitive edge. The increased competition weighed on Nvidia, the largest constituent of the S&P 500 Index. On January 27, Nvidia’s market capitalization declined by nearly $600 billion, marking the largest single-day loss in U.S. stock market history¹. The claim that DeepSeek was developed for only a few million dollars is unlikely. While certain aspects of its development may have been relatively low-cost, the total investment likely ran into hundreds of millions, requiring substantial resources, possibly including Nvidia chips, which the developers may not fully disclose. Regardless of the true development cost, it will still represent a small fraction of the amounts spent by established players in building their AI systems. On the legal front, OpenAI has raised concerns, alleging DeepSeek may have used data generated by OpenAI without authorization in the development of its model. While some aspects of this lawsuit may be strategically motivated, there is a possibility that parts of the claim are legitimate, and legal ramifications could follow.

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US Economy

U.S. GDP expanded at a 2.3% annualized rate in Q4 2024, slowing from 3.1% in the previous quarter and falling short of the 2.5% forecast. Consumer spending remained the key growth driver, rising 4.2%—the fastest pace in nearly two years—led by durable goods purchases, particularly vehicles². However, some of this strength may reflect consumers accelerating purchases ahead of potential tariffs, which could lead to softer spending in the coming quarters. The labor market remained resilient, with unemployment declining to 4.1%³, while retail sales, existing home sales, and industrial production all signaled a broad-based recovery. Inflationary pressures moderated slightly, as lower new rents and slower wage growth helped bring core CPI down to 3.2%⁴ in December. However, inflation remains above the Federal Reserve’s 2.0% target, leading policymakers to hold interest rates steady at their January meeting. Looking ahead, the Fed remains cautious, particularly given potential inflationary pressures from the new administration’s proposed policies, including tariffs.

Global Markets

European stocks outperformed their U.S. counterparts in the first quarter, with the MSCI Europe Index rising 6.90%, compared to the S&P 500’s 2.78% increase. The outperformance was driven by strong gains in sectors such as technology and industrials. Technology stocks in Europe rebounded, with many returning to double-digit growth, supported by solid earnings reports and an improved outlook for digital transformation and innovation. Additionally, industrial goods benefitted from long-term structural trends, including the continued push towards electrification and decarbonization. In Asia, the performance of markets was mixed. Chinese stocks saw notable gains as expectations of stimulus measures from the government helped boost investor sentiment. However, broader market conditions in the region remained volatile, reflecting concerns about ongoing geopolitical tensions and regulatory risks. On the downside, European consumer-related sectors faced pressures from rising inflation and recent price increases, which impacted consumer sentiment and spending. The ongoing challenge of high energy prices and supply chain disruptions weighed on margins in the retail and food sectors, further adding to the inflationary pressures.

Tariffs

Tariffs generally strengthen the U.S. dollar as currency markets view them as a negative terms-of-trade shock to the countries facing the tariffs. For example, in 2018, when the U.S. imposed 25% tariffs on half of Chinese imports, the renminbi depreciated by nearly 10% against the dollar, largely offsetting the tariff’s impact on U.S. import prices. This suggests that markets adjust by devaluing the affected country’s currency to maintain competitiveness. Following the 2024 U.S. election, the dollar appreciated by 6%, reflecting expectations of potential trade policy changes under the new administration. A stronger dollar tends to tighten global financial conditions, especially for emerging markets, which experience reduced purchasing power. This also puts downward pressure on commodity prices, further affecting the currencies of major commodity-exporting nations. In response, companies began front-loading imports throughout 2024 to mitigate the impact, particularly in the infrastructure sector, where delays could significantly exceed budget allocations. Large firms, such as Walmart and Lenovo, moved quickly to bring in products ahead of potential tariffs, absorbing the additional storage costs, which are ultimately passed on to consumers⁵. In recent developments, President Donald Trump announced a one-month delay in implementing tariffs on imports from Mexico and Canada, originally set for February 4, 2025, following negotiations with both countries’ leaders on February 3, 2025. However, there has been no delay in the tariffs on Chinese goods.

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