Last week was once again a week of some drama but just like the previous week, it was hard to tell from the headline market moves.
Global equities ended the week little changed for the second week running, up 0.1% in local currency terms and 0.7% in sterling terms. Government bonds were also broadly unchanged with US Treasuries up 0.4% and UK gilts down 0.1%.
The main sources of the drama were a sharp rotation within equities away from technology to other sectors and violent swings in the price of gold and bitcoin.
The recent underperformance of tech stocks gathered momentum last week. Despite a bounce on Friday, the sector ended the week down 3.0% with the Magnificent Seven falling 4.6%. There were two main causes here.
First, Alphabet and Amazon’s results spooked investors. Their earnings were not the problem. Instead, it was their massive AI-related spending plans which were even larger than expected, echoing fears prompted by Microsoft’s numbers the week before.
Alphabet, Amazon, Meta and Microsoft are now together intending to spend as much as $660bn this year, 60% more than in 2025. The fear here is simple – namely that this massive spend will simply not produce the returns these companies are assuming.
Second, AI company Anthropic released its latest coding tools which appear to threaten not only the business model of the software sector but also pose threats to other software-dependent industries such as data-providers, publishers and law firms. Recent developments highlight a couple of points.
Somewhat ironically, AI is causing the most immediate disruption in parts of the tech sector itself and some tech-dependent sectors. Even though AI should be a source of productivity gains for companies generally, there will be big winners and losers.
Even within the Magnificent Seven, this is true given they compete against each other in many areas and it is still far from clear who will win out ultimately. Only a year ago, Alphabet was seen most likely as a victim of AI whereas now it is viewed as leading the charge and its share price is up 70% over the past year as a result.
At a regional level, there was some divergence in equity performance last week. The US gained 0.9% in sterling terms while the UK and Europe were both up around 1.2%. But Japan was the star performer, gaining 2.8% and rising a further 2% this morning.
The hope here was that Sanae Takaichi would gain a majority in the Japanese election over the weekend. This she did in spades, with the LDP gaining for the first time ever a two-thirds majority in the lower house of parliament. This gives Takaichi a clear mandate to carry out her market friendly policies which include increased fiscal stimulus.
The only caveats to this positive story are the bond market and the yen. Japanese bond yields have risen sharply of late and fiscal stimulus against a backdrop of already very high debt levels carries some risk of further potentially disruptive increases. The yen also continues to present some risks with its weakness only just recently provoking speculation that the government might be forced to intervene to support the currency.
Emerging markets lagged last week with a decline of 0.6%, hit in part by the sell-off in tech. But India, which has been underperforming for some time now, bucked the trend. It was up 4%, buoyed by news that the US has agreed to cut its tariffs from 50% to 18% in exchange for India halting its purchases of Russian oil.
On the economic data front, the main releases were in the US. Manufacturing business confidence, which has been languishing in recession territory for the past three years, saw an unexpected jump in January. While this reinforces the likelihood of continued firm US growth, partly on the back of forthcoming tax cuts, the latest labour market numbers were weak and do pose some downside risk.
Still, the resilience of the US economy and associated profit growth remains a major factor supporting the market in the face of the latest turmoil in the tech sector. With some 60% of US companies now reported, the S&P 500 are on course to see another quarter of robust earnings growth of around 13%, once again handsomely beating expectations at the start of reporting.
We also had the European Central Bank and Bank of England meetings. With Eurozone growth picking up a little and inflation back down close to target, the ECB left rates unchanged and looks firmly on hold for the foreseeable future.
Back home, the main focus was Mandelson’s misdemeanours. But the BOE meeting was not quite as dull as anticipated. Even though rates were left unchanged at 3.75%, it was a close 5-4 vote. With the labour market continuing to weaken and inflation set to fall back to the 2% target in the spring, rates now look set to be cut again as soon as next month with one final reduction later in the year.
Finally, gold and bitcoin warrant a further mention. Gold retreated further early in the week to $4600/oz, as much as 20% below its high of $5600 only a few days earlier, but subsequently recovered to $5000. As for bitcoin, its woes continued, falling as low as $62,000 at one point, before staging a recovery to $70,000 to end the week down 16%.
This coming week, US January data for payrolls on Wednesday and inflation on Friday will be the main focus. UK December GDP numbers are also out on Thursday.
Rupert Thompson – Economist