Blue Chip Portfolio USD Monthly Commentary – Feb 1st, 2025

Financial Market Review Summary

January 2025 proved to be a turbulent month for global markets, characterized by an initial surge in equity markets, followed by periods of volatility. Both in the US & Europe the large cap indices reached record highs before concerns about inflation and the jobs market suggested the Fed might not cut rates at all or only slightly in the year ahead.  To this one can add the emergence of DeepSeek, a low cost new AI model from China which brought down the very high valuations of the key firms in the AI eco-system.

If that wasn’t enough, the threat of the reintroduction of tariffs by President Trump ushered in a risk-off sentiment. Against a backdrop of diverging monetary policy, with the Bank of Japan raising rates, while the European Central Bank signalled further easing, the results were varied across asset classes, with equities and commodities generally outperforming, while certain sovereign bonds struggled.

When all said and done, during Q4 2024, the main equity indices have been making record highs in several countries, and consequently very few commentators would have been surprised if the outcome has been far worse.

 Key Themes and Market Drivers

 1. Inflation Concerns, Interest Rate Expectations & Bond       Issuance

    • Hawkish Economic Data: Early January data fuelled inflation The ISM Services print revealed a surge in prices paid, reaching 64.6 in December—the highest in nearly two years. Additionally, the U.S. jobs report for December exceeded expectations, with nonfarm payrolls increasing by 256K, the fastest growth in nine months.
  • Bond Market Reaction: A significant sell-off in bonds ensued, with the 10- year U.S. Treasury yield rising to 4.79%—its highest level since October 2023—while the 30-year yield briefly exceeded 5%. UK gilts also experienced a sharp decline, with 30-year yields hitting levels unseen since 1998.
  • Shifts in Rate Cut Expectations: The strong economic data initially reduced expectations for Federal Reserve rate cuts, with markets pricing in only 29bps of cuts by December, down from 43bps at the start of the last

However, later this month, softer inflation data and dovish comments from Fed Governor Waller led to renewed optimism, pushing rate cut expectations back up to 47bps.

  • Record Corporate Bond Issuance: Corporate borrowers set a record $83 billion in dollar bond sales, taking advantage of strong investor demand and favourable market conditions ahead of potential volatility from Donald Trump’s re-election.

 2.  DeepSeek AI Model and Tech Stock Volatility

  • Tech Sector Sell-Off: The release of DeepSeek’s new AI model triggered a sharp but short-lived sell-off in U.S. tech stocks. On January 27, the NASDAQ dropped 3.07%, while Nvidia saw a steep 16.97%
  • Concerns Over Valuations: The event underscored the market’s dependence on a narrow group of high-growth tech stocks, raising concerns about the sustainability of elevated
  • Market Rebound: The decline was temporary, and by the end of the month, the NASDAQ was less than 3% below its all-time high. The “Magnificent 7” stocks still posted a monthly gain of 5%.

3.  Geopolitical Risks and Trade Tariffs

  • Policy Uncertainty: The inauguration of the new Trump administration introduced uncertainty regarding trade
  • Tariff Standoff: A brief dispute with Colombia over deportation flights was resolved, but by the end of the month, the White House confirmed tariffs on

Canada, Mexico, and China. This announcement triggered a market sell-off, making the Canadian dollar the worst-performing G10 currency in January.

 4.  Divergent Central Bank Policies

  • BOJ Rate Hike: The Bank of Japan raised its policy rate to 0.5% amid higher-than-expected inflation, making the Japanese yen the strongest- performing G10 currency, gaining 1.3% against the U.S.
  • ECB Easing: The European Central Bank cut its deposit rate by 25bps to 2.75%, signalling further reductions despite economic stagnation and rising natural gas prices. However, European equities remained resilient, with strong performance from banking
  • Fed On Hold: The selloffs in the 10-year and 30-year Treasuries brought into question how many US rate cuts there will be this year, with some commentators even suggesting rate hikes in the months

US Single Stock Performance Highlights Winners:

  • Meta +17.7%: Record Revenue and AI Investments: Meta reported a 21% increase in fourth-quarter revenue, totalling $20.8 billion in net This growth was attributed to AI enhancements in its advertising business.
  • Netflix +9.6%: Surge in Subscribers: Netflix added 19 million new subscribers in the latest quarter, doubling analysts’ expectations. This growth brought its total subscriber base to over 300 million
  • Walmart +8.6%: DEI Program Adjustments: Following broader corporate trends, Walmart scaled back its diversity, equity, and inclusion initiatives, aligning with shifts observed in other major
  • Amazon +8.6%: Benefiting from BOJ rate hikes, the yen was the strongest G10
  • Alphabet +8.0%: Alphabet’s Google confronted multiple antitrust lawsuits, including allegations of monopolizing digital advertising technologies. Proposed remedies from the Department of Justice included divesting certain business segments and altering operational

Losers:

  • Nvidia -10.6%: NVIDIA experienced significant stock volatility following reports that Chinese AI startup DeepSeek developed an advanced AI model using fewer and less expensive
  • Apple -5.8%: Factors contributing to Apple’s decline include concerns over stagnating iPhone sales, particularly in China, and scepticism regarding the impact of its AI initiatives. Analysts have expressed apprehension about the company’s growth prospects, leading to stock downgrades
  • Broadcom -4.6%: AI Chip Collaboration with Apple: Broadcom announced a partnership with Apple to develop a revolutionary AI server chip, internally referred to as
  • Equities: The S&P 500 rose 2.7%, while the FTSE 100 surged 6.2%, both reaching record
  • Commodities: Gold hit an all-time high above $2,800/oz and Brent crude climbed 2.8% to $76.76/bbl
  • Japanese Yen: Benefiting from BOJ rate hikes, the yen was the strongest G10

Losers:

  • Euro Sovereign Bonds: Sticky inflation and rising gas prices led to declines as investors adjusted their expectations for ECB rate
  • Canadian Dollar: The worst-performing G10 currency, pressured by the imposition of U.S.

Regional Market Overview

  • Europe: Equities performed well despite economic stagnation and rising energy The STOXX 600 index climbed 6.4%, driven by expectations of further ECB easing.
  • United States: The S&P 500 set record highs despite the tech sector’s brief turbulence following the DeepSeek AI model
  • Japan: The BOJ rate hike strengthened the yen, but the Nikkei stock index ended the month slightly
  • Tech Sector Fragility: DeepSeek AI model’s impact highlighted the market’s heavy reliance on a small number of high-growth tech