Written by Dominic Williams
The week began with news that the Chinese startup, DeepSeek, had released its latest AI model, which performs at a level comparable to ChatGPT, a product developed by US-based OpenAI. DeepSeek stated its model was built at a fraction of ChatGPT’s cost using significantly fewer of Nvidia’s chips. This announcement sent shockwaves through the market, particularly affecting technology stocks that have been central to the AI boom over the past year, a trend that has contributed towards excessive index concentration within US markets.
AI-focused firms like Nvidia and Microsoft, which have pledged billions to the future of AI development, saw their stock prices fall on Monday. The Nasdaq 100, a technology-heavy index, still only ended the week marginally lower, down -0.9% in GBP terms. This development raises questions about whether the billions earmarked for AI investment are necessary, given that DeepSeek has managed to achieve comparable progress with far fewer resources.
Amid the AI-driven market shifts, two key central bank decisions took place last week, with interest rate announcements from the US Federal Reserve (Fed) and the European Central Bank (ECB).
The Fed held rates steady at a range of 4.25%-4.5%, marking the first pause after three consecutive rate cuts. A more hawkish stance had emerged in the Fed’s December meeting when policymakers indicated they expected to implement only a couple of rate cuts in 2025. Following last week’s meeting, Fed Chair Jerome Powell reiterated that the central bank is in no rush to lower rates, emphasising that they were awaiting further economic data and assessing potential policy changes under President Trump. President Trump reacted by criticising the Fed, blaming it for failing to contain inflation, which he argued was a problem of its own making. Markets responded neutrally to the decision, as it had been widely anticipated. The S&P 500 ended the week slightly lower, down -0.5% in GBP terms.
On Thursday, the ECB met and cut its key interest rate by 0.25% to 2.75%, as markets had forecasted. Economic growth across the Eurozone has remained weak, and the central bank warned of continued headwinds that could further constrain expansion. The prospect of US tariffs presents an additional challenge, with uncertainty over whether their impact would be inflationary or deflationary for the Eurozone. Despite these concerns, European equities have performed well, both in January and over the past week. The MSCI Europe ex-UK index rose +0.8% last week and has returned +8.3% in January, both in GBP terms. A driver of this performance could be related to investor unease over market concentration in the US, particularly regarding the “Magnificent 7” stocks that dominated in 2024. As a result, some investors have taken profits and reallocated capital into other regions, including Europe.
Back on home soil, Chancellor Rachel Reeves delivered a speech announcing a series of major infrastructure projects aimed at boosting economic growth in the UK. Key proposals included the expansion of Heathrow Airport with a third runway and new transport links between Oxford and Cambridge, intended to establish “Europe’s Silicon Valley.”
The speech appeared to be aimed at reassuring investors about the UK’s economic prospects. Since Reeves’ first budget, which outlined significant public spending alongside tax increases, government borrowing costs have risen. However, the latest speech seems to have calmed markets. The yield on UK 10-year gilts, a key measure of government borrowing costs, remained stable at around 4.6%, a decline from the sharp selloff in October, which had pushed borrowing costs to multi-decade highs.
As a result, the FTSE 100 rallied +2.0% over the week, meanwhile, the announcement seemed more helpful for domestically focused companies as measured by the FTSE 250 index which also performed well, rising +2.2%.
The significant market movements in tech stocks this week highlight the importance of maintaining a well-diversified portfolio across both countries and sectors. Diversification helps protect against sharp shocks in specific industries, as evidenced by this week’s volatility.
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