Investment environment overview 1/2025

After some late-month surprises, global equity markets ended January with decent gains following a pullback triggered by the launch of China’s DeepSeek AI model. European equities outperformed their U.S. counterparts, benefiting from easing U.S. tariff concerns and a rotation of investors away from overvalued tech stocks. The S&P 500 finished January with a gain of 2.7%, the Russell 2000 added 2.5%, the Nasdaq-100 was up 2.2%, and the Dow Jones saw a 5.0% monthly gain. As mentioned, European equities fared better, with the STOXX 600 gaining 6.3%, marking its strongest outperformance against the S&P 500 in a decade, and DAX gaining 8.5%. Meanwhile, crypto has not experienced major fluctuations, with BTC/USD currently trading at around 98,800, a 3.3% decrease from the previous month. Regarding interest rates, the Fed kept its base rates steady at 4.25-4.5% during January FOMC meeting, and is currently showing no willingness for further rate reduction, citing the negative effects of tariffs, stabilizing unemployment rate, expanding economic activity and a solid labor market, with inflation remaining elevated. Meanwhile, the ECB lowered its main rates by 25 bps, from 3.15% to 2.90%, as bankers see inflation in the bloc stabilizing closer to their 2% target. The ECB is expected to continue to cut rates gradually, keeping a close eye on weakening EU economic data.

Xi presses the red button

Most likely, the highlight of the month in the global markets was the announcement of the Chinese DeepSeek model, which was the trigger for U.S., European, Taiwanese and Japanese tech, energy and semiconductor manufacturer equities to tumble down by double digit percentages on the 27th of January, and wiping out USD 1 trillion in value off the tech heavy U.S. Nasdaq Composite index. Most notably, NVIDIA’s share price fell by 17%, erasing almost USD 600 billion in market cap and knocking it from its position of the world’s most valuable company. Other notable stocks that experienced major decline were Siemens with a 20% dive on the same day, Broadcom with a 17% plunge and AMD with a 6% pullback.

Has this created a new “Sputnik Moment” in the AI race between China and the USA? DeepSeek was developed with a total cost of USD 6 million, a small fraction of what ChatGPT and other AI models cost, and this was the main trigger of the selloff, as it casted doubt on the massive AI spending by U.S. companies. DeepSeek is claimed to use 95% less energy than its American counterparts, and appears to be able to perform as good as (or, in some cases, even better than) other advanced language models put up by the U.S. businesses. Meanwhile, President Trump has said that DeepSeek should be a “wake-up call for our industries” and “we need to be laser-focused on competing to win”.

European and US equity markets

Source: Bloomberg and Signet Bank

Economic data mixed, but still suboptimal

In January, the Eurozone’s economic landscape showed tentative signs of stabilization. Bloc’s manufacturing PMI rose to 46.6 from December’s 45.1, indicating a slowing contraction but still marking the 17th consecutive month of decrease in the manufacturing sector. Services sector continues to remain stable, with the services PMI coming in at 51.3. The Eurozone composite PMI edged up to 50.2, suggesting modest growth in private sector activity.

In the U.S., the manufacturing sector experienced its first expansion in over two years, with the ISM manufacturing PMI rising to 50.9 in January. However, this optimism was tempered by the announcement of tariffs on imports, which are expected to increase costs and hinder sector’s recovery. Meanwhile, the U.S. services still look resilient and in a better shape than Eurozone’s. Employment indicators for January suggest that the U.S. labor market remains strong. Unemployment has fallen by 0.1% to 4.0%, with economy adding 143,000 jobs in the meantime. In the housing market, elevated mortgage rates have contributed to a slowdown. The 30-year fixed-rate mortgage rate stands at 7.05%, leading to decreased buyer interest due to affordability concerns. Homes are now selling at the slowest pace in five years, averaging 73 days on the market in January 2025.

Benchmark 10-year bond yields

Source: Bloomberg and Signet Bank

Tariff wars return

President Trump reignited global trade tensions by imposing tariffs on U.S. key trading partners. To start with, Trump imposed a 25% tariff on all Colombian goods, with the potential of increasing it to 50% due to Colombia refusing to accept illegal migrant repatriation flights from the U.S. Ultimately, Colombian president Petro backed down, and repatriated the immigrants with Colombian planes, after which Trump canceled the announced tariffs. Additionally, Trump announced a 25% tariff on imports from Canada and Mexico, citing concerns over illegal migration and fentanyl trafficking. Tariffs are going to hit Canada and Mexico in particular much harder. For instance, Canada’s exports to the U.S. make up 18% of Canada’s economy, but American exports to Canada are just 1% of U.S. GDP. Mexico’s exports to the U.S. make up around 43% of its economy, while U.S. exports to Mexico account for about 2% of U.S. GDP. Additionally, a 10% tariff was imposed on Chinese goods, with the Trump administration accusing China of violating WTO rules and contributing to the opioid crisis through the export of fentanyl precursors to the U.S.

Trump’s actions initiated retaliatory measures. Canada responded with 25% tariffs on CAD 155 billion worth of U.S. goods, while Mexico implemented similar measures. China vowed to take corresponding actions on electronics and apparel markets.

While the administration’s intent to address issues like illegal migration and the opioid crisis is understandable, the use of tariffs may not be the most effective solution. Such measures risk straining relationships with allies and will have economic consequences for American consumers and businesses, affecting everyday items like avocados, beer, gasoline, electronics, and clothing. For instance, the price of Modelo and Corona, the best-selling beers in America, is expected to jump by 4.5% due to tariffs.

High Yield bond Indexes

Source: Bloomberg and Signet Bank

Dollar and commodities continue to show strength

As previously mentioned, the U.S. dollar started 2025 on a strong footing, with commodities also showing solid performance. Despite a period of correction throughout much of January, the EUR/USD pair has resumed its upward trend. We previously highlighted the 1.0600–1.0700 area as an attractive level for going long on the dollar, and the market turned lower just before reaching this zone. There is a saying among stock traders: “as January goes, so goes the year”. Currency traders often note that January tends to set the highs or the lows for the entire year. Whether this holds true remains to be seen, but from a technical perspective, the EUR/USD 1.0650–1.0700 range is a key level to watch for a potential larger trend reversal.

January was a strong month for precious metals. Gold hit a new all-time high above XAU/USD 2800, reaching all our projected targets. Silver, while gaining, has yet to show strong momentum, whereas platinum remains in the early stages of a potential bull run. The oil market still is in a “wait-and-see” mode ahead of the OPEC+ meeting on February 3. Despite pressure from President Trump to lower oil prices rapidly, the organization is expected to stick to its plan of marginally increasing supply starting in April.

Gold price, USD/oz

Source: Bloomberg and Signet Bank

Regional Highlights

The OMX Baltic Benchmark Index gained 6.9% in January thanks to positive Baltic States GDP results and prognosis. Meanwhile, Lufthansa has acquired a 10% stake in Latvia’s airBaltic for approximately EUR 14 million, aiming to strengthen its European presence and access additional aircraft amid supply constraints, while providing airBaltic with important funding for further growth. To add, Estonia and Lithuania have committed to significantly increase their defense spending to at least 5% of GDP in the future, aiming to comply with President Trump’s yet another demands.