Weekly Market Update - AI battleground

The latest economic news and market highlights from the UK and abroad.

The key takeaways

📉 DeepSeek triggers US tech slide – US AI-linked stocks, including Nvidia and Microsoft, fell heavily early in the week as China’s startup, DeepSeek, unveiled an AI chatbot powered by far less advanced chips than its US rivals.

✂️ EU cuts interest rates – the European Central Bank cut its headline interest rate by 0.25%, in recognition of easing price pressures, as Q4 GDP stagnated for the bloc. 

🛍️ US growth slows – GDP growth estimates for Q4 came in below forecasts at 2.3%, driven by continued rises in personal consumption spending. 

🫸 US rates hold steady – interest rates remain unchanged in the US, despite some political pressure, as growth continued. Policymakers await more clarity on Trump’s potential moves on immigration, tariff and tax policies. 

✈️ Reeves' growth push – UK chancellor Rachel Reeves announced plans to revive UK growth, from encouraging pensions to invest more in the UK, to setting up a hi-tech ‘growth corridor’ between Oxford and Cambridge – plus building a third Heathrow runway.

In the US, investors await more details on the scale and scope of Trump’s tariffs, especially after today’s announcement that they’ll extend to Canada and Mexico from 1st February. We’ll be keeping a close eye on the economic impact. 

Over in the UK, while there was a positive reaction from business leaders around the long-term vision of Rachel Reeves’s plans for growth, doubts remain over feasibility and lack of immediate investor incentives. Markets however, remained largely unchanged after the announcements.

Chart of the week - China produces half of world's AI talent

Source: AlpineMacro, January 2025, *Based on undergraduate degree as of 2022

The emergence of China’s DeepSeek AI Chatbot shook US tech companies and those involved in the production of chips used in AI. At one point wiping nearly $590 billion from Nvidia’s market cap. The Chinese chatbot is said to be produced with a fraction of the resources of its western competitors and with much less advanced chips. If true – which is yet to be confirmed – this raises serious questions about the obscene amount of spending tech giants have been pouring into their own AI development. In turn, this could hit the business model of companies like Nvidia who provide some of the world’s most advanced chips, at very high prices.

But is DeepSeek really all it claims, or has it just found a way to avoid US sanctions and access western technology? Either way, the chart above shows that the competition is certainly heating up. China is producing half the world’s top AI talent, and registering the largest number of generative AI patents in the world. If DeepSeek doesn’t disrupt the US AI industry, perhaps China’s next breakthrough product just might.

Investors must be conscious of the concentration risk in a handful of western mega-tech stocks, given their enormous weighting within US and world indices. As we’ve seen this week – it doesn’t take much to knock them off their lofty growth projections and for values to fall.

Strong week for Europe – broad European markets rose thanks to the ECB’s interest rate cut, while the UK saw gains driven by corporate earnings, especially in oil and gas.

US sinks on AI competition – US AI-linked stocks fell on threats of Chinese competition, which pushed the broader indices down, with the tech-heavy NASDAQ hit hardest.

Asian markets move on tech performance – Japan’s Nikkei 225 ended flat as signs of improving economic conditions fought a wider tech sell-off. Meanwhile, the Hang Seng was more positive as China’s tech stocks, including Alibaba and Tencent, rocked the trend with a strong week.

Oil falls – oil pared back some of its YTD gains on threats of US tariffs against Canada, which could restrict imports. While tariff talk had the opposite effect on gold, which gained as investors sought a safe haven amid potential trade wars.

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