
What a week that was ! A relatively small and new Chinese start-up shocked the Tech world with their impressive AI lab (DeepSeek) which promises to democratize and commoditize the use of AI, with its open-source strategy and using just a fraction of the computing power that the US models use. Then, Musk in the conference call that followed Tesla's disappointing earnings report, promised that humanoid robots are coming soon, as well as robotaxis.
But Trump wanted to steal the show and announced over the weekend tariffs on Canada/Mexico (25%) and China (10%) which will be in place tomorrow. The EU tariffs are also coming soon, he said. Canada has already responded with 25% on US imports and Mexico is preparing its own. Interestingly and worryingly, Trump acknowledged that there will be pain in the markets, for which he said "he doesn't care", a surprise stance as this was a major argument for the view that he is going to be careful not to upset financial markets. Looking at our screens this morning, there is bloobath around the world already, at this very early stage of the day and the week.
Turning to DeepSeek, their emergence might have profound implications on both the valuations of certain US mega caps and the future of AI. DeepSeek seems to have made significant scientific breakthroughs around model architecture to radically improve reasoning per unit of compute. They seem to be producing results only months behind the well known models at a fraction of the cost. Then, they decided to publish exactly what they are doing and provide the tool for others to use at low cost, at one-twentieth of the cost of OpenAI’s model. They could be a threat to the leading AI labs, as it is clear that the existing close-to-state-of-the-art models can quickly be commodified. For those who might remember in the late 90s when the internet appeared in our lives, the telecom companies' share prices had gone "through the roof" because everyone was going to pay to have internet access. Which of course proved to be true. But what happened is that internet access and data usage became so commoditized that prices collapsed, and telecom companies had spent billions to build the infrastructure on a high expected return-to-investment which in a few years had dropped to next to zero.
On the other hand, demand for compute will likely accelerate, because of DeepSeek's low cost open-source strategy. We read that researchers around the world are energized and excited with the new development. This new development will cause AI R&D to speed up because people outside of the existing "black-box" labs (such as OpenAI, Anthropic, and Google) can now help develop the next-generation models. Moreover, even people in the US labs are excited because many of them previously did not know how reasoning models worked. This could be AI's "Sputnik moment" , which could lead to a further acceleration of its wider usage, to the benefit of productivity and eventually economic growth.
But of course, this not going to run smooth, as a Chinese company is now in direct competition with the US supremacy. Tariffs, chip curbs, propaganda will all be used by the US to try and stop this rush to commoditization and democratization of AI. For the moment, the US mega caps have welcomed the new AI lab and even Nvidia, which is the most at risk for lower growth of revenues ahead, publicly commented that DeepSeek will drive demand higher for its chips. What it did not mention is that the price of their most recent and advanced chips might go down, as they might not be needed at the assumed quantities anymore. AI Wars might be coming soon ...
US equities suffered on Monday, but partially recovered during the rest of the week. Still, the S&P500 finished 1% lower and Nasdaq -1.5%. In contrast, Chinese Tech stocks (the likes of Baidu and Alibaba) soared by 10%+. Europe managed to post another positive week, with the Swiss SMI rising 2.5%, helped primarily by the rally in pharmaceuticals (Novartis, Roche). The month of January ended with Europe being up almost 9%, the S&P500 a respectable 2.5% and Nasdaq underperforming with 1.5% gains. February is not starting so well, however.
The ECB cut the deposit rate by 25bp, to 2.75%, as expected. The main message from the statement and the press conference is that the ECB considers monetary policy to still be restrictive. President Lagarde said that "we know the direction of travel” on interest rates and that it is premature to have a discussion about where interest rates will stop. The market is now pricing another 75bp of cuts to take the depo rate to 2%, by the end of the year. She also said that almost all inflation indicators are pointing lower, with the outlier being wages, which continue to hold up, and especially in the services sector. But a s a reminder the Services PMI indicator has been rolling over, which bodes well for lower wage growth down the road. Overall, we see the ECB meeting as a confirmation of our view that rates in the Eurozone are going to fall significantly in the next 12 months, making the recent rise in EUR bond yields a very compelling buying opportunity for the 4-7 year maturities of high quality issuers.
The FED, on the other hand, left rates unchanged, also as expected. Chair Powell's basic message was that the condition for resuming rate cuts was more progress on inflation moving toward 2% ("though it did not need to be exact 2%") and/or unexpected softening in the labor market. "We will be focusing on seeing real progress on inflation, or alternatively, some weakness in the labor market, before we consider making adjustments," he said. The market took notice of the fact that the phrase "inflation has made progress toward the Committee's 2% objective," was replaced in the text by "Inflation remains somewhat elevated." But Mr. Powell downplayed the significance of this minor recalibration of phraseology. Overall, this meeting also confirmed our view that US rates will be hard to come down further in the next 3-4 months, as growth remains solid, the labor market tight and inflation is still above 2.5%. The tariffs which were announced by President Trump make things even more complicated.
Eurozone's January inflation numbers are out today. Both the headline and the core CPI are expected to have remained unchanged at 2.4% and 2.7% respectively. On Friday, Germany's and France's numbers were a touch lower than expected, so we could see a minir positive surprise on the Eurozone composite inflation numbers today.
Bonds had a positive week, after the major central bank meetings. The German yield curve dropped more than 10bp across maturities, with the 10-yr back below 2.50%. Same in the US, with the 10-yr yield finding itself at 4.50%, down almost 30bp from the recent high. The Eurozone inflation number out today, could make the bond market move again. As a tailwind we highlight the huge short positions of CTAs (algorithmic trading programs) which will have to buy bonds en masse, in case yields move lower, to stop losses.
Chart of the Week : US sectors, Year-to-date performance.

The above chart, shows the year-to-date performance of the US sectors. For now, last year's best performer (Technology) is negative , as corporate earnings from Microsoft as well as a sell-off in Nvidia and other semiconductor stocks have impacted the index. Energy has also corrected during the last two weeks, dropping from first place. Healthcare is now on top of the list followed by Financials who have several tailwinds behind them : Trump's deregulation promises, steep yield curve, excessive trading by retail and institutional clients and M&A activity. Staples continue to underperform after last year's sluggish performance, but any market turmoil ahead, could bring them to the forefront of investor/trader interest.
Disclaimer
• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.
• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.
• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.
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• Sources: Chart of the Week : KSH, FactSet
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