– Equity markets start the year well, led by Europe and the UK
– DeepSeek and Trump tariff policy causes volatility in US equities
– Broad strength across bond markets, ECB cuts rates and Fed holds
Global equity markets started the year on a positive note, recovering from the headwinds experienced towards the end of 2024. European equities rebounded sharply, posting gains of 6.8% in January, following a challenging December driven by concerns around tariffs and weakness in key sectors. The FTSE 100 was another standout performer, rising 4.5% and reaching an all-time high, marking its best monthly performance since November 2022.
Despite ending well, U.S. equities exhibited significant volatility, particularly in the final week of January, driven by a combination of earnings reports from major technology firms and a significant market shakeup caused by DeepSeek’s AI breakthrough. The S&P 500 and Nasdaq saw substantial swings, reflecting the uncertainty around AI-related investments and potential disruptions to the current semiconductor landscape.
Emerging Markets and Asian equities underperformed relative to developed markets, despite exhibiting lower volatility levels. The FTSE 250 also struggled to keep pace with the broader market rally, highlighting continued economic uncertainty in the UK’s domestic economy.
Bonds had a steadier and more positive month, as compared to late 2024, with corporate bonds outperforming government bonds. High-yield bonds led the way, reflecting continued investor appetite for risk in a more stable market environment.
Inflation-linked bonds also performed well, supported by concerns over inflation persistence, particularly in the U.S., where upcoming policy decisions and geopolitical risks weighed on sentiment. Market expectations for rate cuts in 2025 have moderated, with fewer cuts now priced in compared to earlier forecasts, leading to upward pressure on bond yields across major developed markets.
Notably, European government bonds were the weakest performer in the bond space, reflecting ongoing economic stagnation and political uncertainty. The European Central Bank (ECB) moved to cut rates to 2.75%, as expected, with markets anticipating similar action from the Bank of England in their February meeting. In contrast, the Federal Reserve opted to hold rates steady, reinforcing expectations of a “higher-for-longer” stance on U.S. interest rates.
In currency markets, the Euro had a mixed month, gaining against the pound and the dollar, but falling against most emerging market currencies.
A major event impacting markets in January was the unexpected impact of DeepSeek, a Chinese AI company that launched a highly competitive AI model at, reportedly, a fraction of the cost of its Western counterparts. This triggered widespread concern among investors regarding the sustainability of the heavy capital investments made by major technology firms in AI infrastructure.
The revelation that DeepSeek had trained its model using older and cheaper semiconductor chips sent shockwaves through the semiconductor sector, with Nvidia, in particular, losing nearly $600 billion in market capitalisation in a single session. To put the size of this move into context, only 14 listed companies in the world have a market capitalisation higher than the amount that Nvidia lost.
Despite this disruption, broader equity markets demonstrated resilience, with around 300 S&P 500 stocks remaining flat or positive despite the index’s overall decline, as shown in the chart below. This supports the view that equity market leadership is gradually broadening beyond the “Magnificent 7” tech stocks, a trend that may continue through 2025.
January also marked the beginning of President Trump’s second term, bringing with it immediate policy shifts that impacted market sentiment. His administration moved swiftly to implement tariffs, initially suggesting a postponement on Mexico and Canada before abruptly reversing course and imposing 25% tariffs on both nations. Additionally, a 10% tariff was levied on Chinese goods, with the possibility of further increases in the future.
These tariff measures have raised concerns over inflation, as the cost of imported goods will rise and consumers may feel the brunt of these increases. Early estimates suggest that tariffs on Canada and Mexico will have a more significant inflationary impact than those on China, given the changing trade flows since Trump’s first term.
Alongside tariffs, stricter immigration controls were introduced, further tightening an already constrained U.S. labour market. With unemployment at historically low levels, these policies risk exacerbating labour shortages, which could drive wage inflation higher and impact the broader economy. Bond markets have already reacted to these developments, with yields rising in anticipation of prolonged inflationary pressures.
The unpredictability of Trump’s policies, particularly in trade and labour markets, has introduced a new layer of volatility to financial markets. Investors will need to remain adaptable as more clarity emerges on the administration’s long-term economic strategy.
January provided investors with a stark reminder of the importance of diversification and caution in navigating an increasingly complex global economic landscape. While equity markets started the year strong, volatility remains a key theme, particularly in the technology sector.
The bond market’s response to shifting inflation expectations and central bank policy decisions will continue to be a focal point, as investors weigh the impact of higher-for-longer interest rates against slowing global economic growth. Additionally, geopolitical risks, trade policy shifts, and evolving AI investment dynamics will be key factors influencing market direction in the coming months.
As we move further into 2025, maintaining a well-diversified approach and adapting to changing market conditions will be essential for investors seeking to manage risk while capitalising on the available opportunities.
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This publication was prepared by Henry Scargill CFA, Portfolio Manager for Fairstone Private Wealth Ltd (United Kingdom).Fairstone Private Wealth Ltd. is authorised and regulated by the Financial Conduct Authority (FRN: 457558)
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Information as of the date of publication 27/01/2025
