KBC Sunrise Market Commentary 28/01/2025 via Trader Talent

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Market Commentary

Markets

•          China’s DeepSeek R1 AI model sparked risk-off across the board. It was yesterday’s main trading theme in absence of other major news. Trained at a significantly lower cost and with inferior chip technology, R1 raised questions to the lofty valuations of US big tech. AI poster child Nvidia sank 17%, wiping out some $560bn in market capitalization. Others suffered to a lesser extent. Google parent Alphabet lost more than 4%. Microsoft gapped 5% lower but was picked up along the way. Meta Platforms even swapped a lower open for a record high. On an index level, the Nasdaq obviously underperformed. It lost some 3% compared to the slight 0.65% gain for the Dow. Core bonds enjoyed a safe haven bid. US Treasuries outperformed Bunds. Yields closed between 3.8 and 9.3 bps lower. German rates eased around 4 bps across the curve. The Japanese yen and Swiss franc scored well in the currency landscape. USD/JPY fell below the 155 mark to close at 154.5. EUR/CHF erased Fridays PMI-driven gain, back towards the 0.945 area. The US dollar lagged its haven peers during Asian and European dealings but got a better bid in US dealings. EUR/USD ended the day even marginally weaker around 1.05. The trade-weighted index (107.34) bounced back after touching 107 before finding new vigor this morning and attacking the 108 barrier. EUR/USD falls to 1.044. USD-strength followed on quotes from Trump in a response to Treasury Secretary Bessent’s approach to import tariffs. The Financial Times citing people familiar said Bessent favours a 2.5% universal tariff, to be raised by the same amount each month. Trump said he wants tariffs to be “much bigger” than that while also vowing to slap levies on foreign-produced chips, pharmaceuticals and metals such as steel, aluminum and copper.

•          The R1 bombshell came at a peculiar timing with Chinese markets starting today closed for a whole week (Lunar NY) and just ahead of the US earnings season shifting into higher gear. Microsoft and Meta report tomorrow, Intel and Apple on Thursday. For today, though, we’ll look out whether yesterday’s stock sell-off already lures some dip buyers. Futures in any case suggest the dust has settled a bit and core bond yields recoup some of the basis points lost yesterday. The eco calendar contains US durable goods orders and Conference Board consumer confidence but we don’t think they’ll move the market needle by a lot ahead of Wednesday’s FOMC and Thursday’s ECB meeting.
 

News & Views

•          Prices at UK shops dropped 0.4% M/M January compared to December, the British Retail Consortium reported. Prices were 0.7% lower y/y, but this was -1.0% in December. Non-food product prices were down -1.8% M/M and 0.9% lower Y/Y. Food price inflation accelerated to 0.5% M/M and 1.6% Y/Y. In a comment accompanying the release, BRC indicated heavy January discounting in some sectors including furniture and fashion. At the same time the consortium warned on a potential risk of more upside price pressures going forward. The trend of higher food prices might continue with the M/M rise the fastest since April last year. BRC also indicates that retailers might push up prices in response to higher social security contribution and higher (minimum) wages. UK headline CPI inflation slowed to 0.3% M/M and 2.5% Y/Y in December, but might rebound from that level.

•          Business confidence in Australia recovered modestly according to the confidence survey from National Australia Bank, with the index rising to -2 from -3 in December. The overall level remains low after a substantial decline in November. Business conditions, rising from 3 to 6, also reversed part of the sharp November decline. Trading sales picked up, as did profitability (4 from 0). The employment index also rose marginally (4 from 3). Cost price indicators still showed no consistent, broad-based downward trend. Firm’s purchases costs were seen at 1.5% Q/Q from 1.3% Q/Q. Prices rises of final products also rebounded (0.9% Q/Q from 0.6%). The labour cost index slowed further and at 1.4% Q/Q was materially lower than in summer of last year. The data come as markets are considering the start of the RBA easing cycle at the upcoming 18 February policy decision. A 80% chance of an inaugural 25 bps cut is discounted. The December and Q4 inflation data published tomorrow will be decisive. Disregarding the broader USD swings, the Aussie dollar (AUD/USD 0.626) continues to trade soft against other majors, including the euro and the yen.
 

Graphs

GE 10y yield

The ECB delivered a fourth rate cut in December and dropped the reference to keeping policy restrictive. Inflation forecasts barely changed while the growth outlook deteriorated. Sticking with a data-dependent approach, we think the ECB eyes 25 bps rate cuts in January and March after which a proper evaluation on neutral interest rates is necessary. Money market positions remains too dovish. The German 10-yr yield rebounded to 7-month highs in a steepening trend.

US 10y yield

The Fed cut rates by 25 bps in December but added that “the extent and timing” of further cuts depend on data. Updated forecasts including an upwardly revised neutral rate (3%) and higher inflation forecasts with risks skewed to the upside completed the Fed’s hawkish twist. Higher for longer is back. The 10-yr yield tested the 2024 high (4.73%) on stellar December payrolls, but took a pause assessing the policy of the new US government.

 

Calendar & table

Contacts