Summary:

Last Week Review

• STAR WARS & TRADE WARS: CHINA AI & US TARIFFS. In a relatively short trading week that is still in the atmosphere of the Chinese New Year holiday, there were several important events that shook the world order, ranging from the buzz of China’s AI model DeepSeek to Trump’s tariffs on Canada, Mexico and China which took effect last Saturday. In the midst of the economic slowdown still being felt in China, the launch of DeepSeek, which is much lower cost supported by the use of chipsets that are also cheaper but not inferior in performance to ChatGPT, managed to propel the Nasdaq 2.9% on Monday last week. Nvidia had dropped as deep as 17% in a day on the thought that perhaps the use of its expensive chipsets is not so significant anymore in the future. China has been quietly developing their own AI to the extent that Alibaba also announced their AI model which is claimed to be able to outperform ChatGPT & DeepSeek. Alibaba Cloud has launched the “Qwen2.5-VL” model, an AI model that can control PCs & smartphones. Not only that, China has also prepared to launch tens of thousands of satellites in low orbit to rival SpaceX on their Starlink internet project.

• In the midst of the ongoing global “star wars” related to super technology, Indonesia is still struggling with cutting state budget items that are suspected of being wasteful. This austerity measure is actually also being implemented by the Trump administration where the president himself is offering early retirement to their federal workers (outside the military, postal service, and national security) with an incentive of 7 months of severance pay. If at least 5%-10% of federal workers accept this offer, the US could save around USD 100 billion. In Indonesia, President Prabowo allegedly dismantled the state budget to 9 levels and aims to cut up to Rp 306 trillion.

• Trump is demanding that interest rates in the US and in other parts of the world come down immediately. It seems that his call is in line with the 4th quarter US GDP which plunged to 2.3% qoq, below expectations of 2.7% and also from the 3rd quarter at 3.1%. However, it looks like Fed Chairman Jerome Powell will still find it difficult to change his cautious stance as signs of US Inflation heating up again are still there, as the PCE Price index (Dec) showed a 0.2% yoy increase to 2.6%. At the January 30th FOMC Meeting, there was no room for a rate cut (as expected) and market surveys suggest the best potential for a rate cut would be around June-July at the earliest. Keep in mind that the world may be facing another phase of rising inflation, one that is evident in Japan, so the Bank of Japan had no choice but to raise interest rates 25bps to 0.5%, the highest level in 17 years.

• Most recently, the Trump administration confirmed that they are preparing to impose new tariffs on imports from Mexico, Canada, and China; taking effect on Saturday. They claim that the tariffs are partly in response to illegal fentanyl entering the US. Trump has already imposed a 25% tariff on imports from Mexico and Canada and a 10% duty on China. President Trump also said that eventually, the US will also impose tariffs on chipsets, as well as oil and gas; with an estimated timeline of around February 18. In the spirit of putting the US first in the global arena again, Trump also said that the US will impose additional tariffs on steel, aluminum, and eventually copper; which he believes will save the US steel industry. He emphasized that the execution of these tariffs is crucial and indisputable, and will generate huge revenues for his country; even Europe may soon get its share.

This Week’s Outlook

• Global financial markets are preparing to react to US President Donald Trump’s imposition of tariffs on imports from Canada, Mexico and China, which are expected to exacerbate concerns over the uncertain impact of rising global trade tensions. Meanwhile, early February will see new US payroll data that could provide fresh  insights into the state of labor demand in the world’s largest economy – and potentially be a deciding factor in the Federal Reserve’s future interest rate path.

• US tariffs, which have been a consistent source of uncertainty for markets in recent months, will be a major concern this week. Trump previously threatened these countries with a February 1 tariff deadline to encourage them to take action to stem the flow of illegal immigrants and opiate fentanyl into the US. However, before the weekend, Trump stated that there is not much these countries can do to avoid the levies, which could disrupt trillions of dollars worth of annual trade. Stock markets ended lower on Friday, weighed down by anxiety over Trump’s trade policies. Analysts expect a broad market sell-off on Monday.

• The US tariffs exclude ENERGY PRODUCTS FROM CANADA, which face a levy of 10% (instead of 25% as is common). Crude oil accounts for about a quarter of all imports the US receives from Canada, worth about $100 billion by 2023, according to data from the US Census Bureau cited by Reuters. However, Trump added that in the future his administration would also announce broader tariffs related to oil and natural gas (around February 18); prompting a comment that triggered a surge in oil prices in extended hours trading on Friday. In the previous week, benchmark Brent and West Texas Intermediate crude oil prices closed lower, as traders worried that a sharp rise in fuel costs would hurt global economic activity and broader energy demand.

• This week investors will have the opportunity to analyze US EMPLOYMENT DATA, including Friday’s key US Nonfarm Payroll report. Economists forecast that the US added 154,000 jobs last month, down from 256,000 in December. Meanwhile, the unemployment rate is expected to reach 4.1%, the same as the previous month’s pace. Average hourly earnings growth is forecast at 0.3%, also the same as December’s rate. The figures will help determine the state of labor demand early in the new year and could be a deciding factor in how the US central bank shapes monetary policy in the months ahead. Along with inflation remaining above the Fed’s target level of 2%, the strong job market helped support the central bank’s decision last week not to change interest rates and signaled that the central bank is in no rush to lower borrowing costs further.

• The Q4/2024 FINANCIAL REPORT season will still present some big company names such as Alphabet & Amazon, following Microsoft & Meta which have been released last week. Market participants will be eagerly awaiting comments/company guidance on how these tech giants anticipate the emergence of DeepSeek’s AI model, which uses a chipset that is not so sophisticated that it can cost only about USD 6 million to manufacture. Semiconductor group Qualcomm and chip designer Arm Holdings will also announce their latest earnings reports this week, as will ride-hailing company Uber.

• THE BANK OF ENGLAND will hold its latest policy-setting meeting this week, and is widely expected to cut interest rates and hint at more reductions to come as the UK economy stagnates. Economists anticipate the BoE will cut its benchmark interest rate to 4.5%, from 4.75%, on Thursday, when it will also update its economic growth and inflation forecasts.

• ASIA-PACIFIC MARKETS braced for volatile markets at the start of the week, with Australian, Japanese and South Korean futures all pointing to a lower open on Monday; and BITCOIN last down 3%. The US Dollar strengthened across the board, surging to a 22-year high against the Canadian Dollar and dragging the Euro close to parity. GOLD is poised to hit new record highs, but US TREASURY may be caught between safe haven demand and concerns about the inflationary impact of tariffs. INDONESIA to announce Inflation rate for January.

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