In a week when the US Federal Reserve and the European Central Bank held their first interest rate meetings of the year, the main topic of conversation wasn’t about interest rates. DeepSeek, a Chinese artificial intelligence chat bot, was not well-known among investors before last Saturday but this week has become the talk of the town.
DeepSeek is a Chinese startup that launched its free AI chatbot last week, and was developed on a fraction of the budget of other competitor AI models. By Monday morning, it had overtaken US rival ChatGPT in downloads from the Apple app store. Questions are now being raised about the future demand for chips and the importance of huge investments into power production to fuel data centres, as DeepSeek has highlighted high-speed AI models can be developed on low budgets with much less power needs. This had a drastic impact on large-cap technology stocks, with $593billion wiped from Nvidia’s market value in a single day, a new record. It seems the barriers to entry in the market are not as great as initially assumed, opening the door for other companies to enter. It has also brought into question the decision of large firms such as Microsoft and Meta to invest billions of dollars into expensive chips and data centres, which ultimately may not be required. It is potentially a pivotal moment with investors previously paying high prices to access the AI chip makers (Nvidia) and users (other Mag 7 companies) believing they had a monopoly over this market and there were high barriers to entry – that narrative is now looking precarious. Given the valuations of these companies, their execution needs to be faultless going forward, so this is definitely something to watch.
Norway is home to the world’s largest sovereign wealth fund, which reported a record annual profit of 2.51 trillion crowns ($222billion) for 2024. This is the second straight year of record profits and Mr Tangen, CEO of Norges Bank, acknowledged the extraordinary gains, noting almost 50% came from technology stocks, including Nvidia. He warned that such returns will not continue forever, as the bank’s stress test highlighted the risk posed by an AI stock correction, debt crisis or geopolitical shock.
The US Federal Reserve announced their decision to keep interest rates unchanged on Wednesday. Fed Chair Jerome Powell shared his belief that the current policy stance is “well calibrated”. There was a large emphasis on “waiting to see what policies are enacted” as US President Trump’s promises of import tariffs and immigration crackdowns have inflationary implications. The US Fed is also aware of the risks associated with cutting rates too aggressively from the 22 year high of 5.5% we saw in July 2023 to August 2024. President Trump does not seem to be Chair Powell’s biggest supporter, as he claimed the US Fed had taken their eye off the ball and spent too much time on DEI (Diversity, Equity and Inclusion), “green” energy and fake climate change.
560 miles north of Washington DC, is Ottawa, where the Bank of Canada (BoC) met and they continued their rate cutting journey with a 25bps (0.25%) cut, bringing the policy rate down to 3%. The move was widely expected by markets, with the bank now cutting interest rates for the sixth successive time. The BoC did not give any guidance on the future rate path but did express concerns about a looming trade dispute with the US, which would test Canada’s economy resilience in a year they had hoped would be an economic revival.
The European Central Bank met on the Thursday and, as markets forecasted, also cut rates by 25bps (0.25%) bringing rates to 2.75%. This rate cut can be attributed to continued weak growth across the Euro economy. ECB President Christine Lagarde noted that the “economy is still facing headwinds” and believes that tariffs implemented will have a “global negative impact”. Markets are forecasting three more rate cuts over 2025 but acknowledge the pace and magnitude of any further cuts will be data driven.
The most positive news of the week is the strong performance in UK equities. The FTSE 100 closed at a record high, smashing through the 8,600 mark and while the more domestically focused FTSE 250 has lagged behind, it has still risen around 2% throughout the week. Government bond yields have continued to fall this week from recent elevated levels in January which has provided support to equity markets. The Bank of England meet next week and they are expected to deliver a 0.25% cut which should act as support to the UK consumer.
Nathan Amaning, Investment Analyst
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