Market Overview

Last week delivered a mix of optimism and caution in global markets, as hopes around upcoming dovish central bank policies were countered by a sharp selloff in the technology sector. In particular, US equities faced significant pressure, with the Nasdaq leading declines due to fears of Chinese competition in AI. The S&P 500 dropped 0.29%, the Dow slid 0.32%, and the Nasdaq declined 0.59%, however Asian markets were mixed, while European stocks benefitted from positive corporate earnings, particularly in luxury goods and consumer discretionary sectors. Optimism surrounding Thursday’s anticipated ECB decision benefited European equities, although rising bond yields added complexity to the broader sentiment.

Key Macro and Policy Developments

Chinese AI startup DeepSeek sent shockwaves through global markets, unveiling a cost-effective AI model capable of operating on reduced-capability chips. This development raised concerns about US tech dominance, particularly in sectors reliant on high-value AI applications. Companies like Nvidia, which heavily depend on cutting-edge hardware demand, saw valuations challenged. Additionally, the announcement highlighted broader challenges within the AI supply chain and prompted debates over competitive dynamics between US and Chinese innovation ecosystems.

Earnings for Q4 are off to a strong start, with 10% of S&P 500 companies already reporting double-digit surprises in the Financials and Consumer Discretionary sectors. This week, the focus shifts to tech heavyweights like Apple, Microsoft, Meta, and Tesla, as Q4 has historically been a strong quarter for big tech companies, though this year may present mixed results. Markets anticipate tech earnings growth exceeding 20%, compared to less than half that figure for overall earnings growth. Capex on AI will be closely watched, with Meta’s bold $65 billion investment plan for 2025 illustrating the sector’s high stakes.

The Federal Reserve is expected to pause its rate-cutting cycle at Wednesday’s meeting, though guidance on 2025’s trajectory will be crucial. Chair Powell is likely to highlight rental market stabilisation as a sign of easing price pressures, which could signal dovish intentions for the year. Meanwhile, the ECB’s anticipated 25bps rate cut reflects broader Eurozone economic fragility. However, recent inflationary trends may challenge the central bank’s dovish stance, with policymakers navigating diverging inflationary dynamics across member states.

Advance Q4 GDP estimates on Thursday are forecast to show annualised growth of 2.7%, driven by resilient consumer spending and a manufacturing rebound. Notably, material and cyclical sectors are expected to contribute disproportionately to growth. Analysts will closely examine inventory build-ups and trade balances for additional insight into growth drivers, as the business cycle appears to be expanding rather than stabilising.

Bitcoin fell below $100,000, declining 3.47%, as risk-off sentiment spread amid regulatory uncertainties. Ethereum and Solana mirrored declines, falling 4.58% and 5.33%, respectively. The recent volatility underscores lingering unease about US policy clarity on digital assets, with President Trump’s ambiguous stance offering mixed signals about future regulation. Consequently, investors are increasingly seeking stable asset platforms amid heightened sector volatility.

Market Reaction

Equities: US markets grappled with tech sector weakness, led by sharp declines in semiconductor and AI-driven firms. European equities remained steady, buoyed by positive earnings in luxury and consumer discretionary sectors, as well as expectations of ECB action.

Fixed Income: US Treasury yields softened ahead of bond auctions and Fed policy announcements, reflecting cautious investor sentiment. Eurozone bonds rallied as markets priced in the likelihood of further monetary easing, although rising inflation trends may temper long-term expectations.

Currencies: The US dollar firmed slightly, supported by geopolitical concerns and soft economic data that signalled relative strength compared to other G7 currencies, combined with increased hedging activity that further stabilised the greenback.

Commodities: Gold prices retreated on profit-taking after failing to breach key resistance levels. Crude oil prices eased amid concerns about weaker global demand and mixed signals from OPEC production commitments.

Investors face a pivotal week as major tech earnings and central bank decisions take centre stage. Elevated volatility market-wide can be expected as sectors adjust to the rapidly shifting risk sentiment, particularly in areas tied to emerging technologies. While dovish central bank policies could bolster sentiment, ongoing uncertainties around AI and geopolitical risks warrant vigilance this week.