Bitcoin Slumped

Hello Traders, we hope you’re having a nice weekend. Here are some of the biggest stories this week:

1. Consumer confidence in the US plummeted.
2. Nvidia brought in record sales and profit last quarter.
3. A crypto rout left bitcoin down more than 25% from its all-time high.
4. European defense stocks surged to record highs.
5. Higher military spending is set to impact Europe’s economy and markets.

Dig deeper into these stories in this week’s review.

US

New data this week showed US consumer confidence fell in February by the most since August 2021, when the contagious Delta variant of the coronavirus was sweeping through the country. More specifically, the Conference Board’s gauge of confidence decreased 7 points to 98.3 – the third straight month of declines – on concerns about the broader economic outlook, adding to evidence that uncertainty over the Trump administration’s policies is weighing on households. Meanwhile, inflation expectations over the coming year increased to the highest since May 2023, reflecting anticipated price increases due to Trump's planned tariffs. That aligns with a separate report from the University of Michigan released last week that showed US consumers’ long-term inflation expectations rose to the highest level in almost three decades.

Nvidia

All eyes were on Nvidia this week as the chipmaker unveiled its latest results on Wednesday. You can understand why investors were paying close attention: the world’s second-most valuable company is at the heart of the AI frenzy that has helped drive the market higher over the past couple of years. And, once again, Nvidia managed to beat estimates: its revenue last quarter increased by 78% from a year ago, hitting a record $39.3 billion. It was a slower pace of growth from the previous quarter but still above analysts’ expectations for $38.3 billion. And if that wasn’t enough, profit came in at a record $22.1 billion – comfortably ahead of forecasts.

It wasn’t all good news though. Nvidia warned that its gross profit margins would be tighter than expected as it rushes to roll out a new chip design called Blackwell. And then there’s the risk of US tariffs weighing on results. The mixed outlook comes at a shaky time for the AI industry, with Nvidia’s shares dipping this year on concerns that data center operators will slow spending. What’s more, Chinese startup DeepSeek has sparked fears that chatbots can be developed on the cheap, potentially reducing the need for Nvidia’s powerful AI chips. Though Nvidia executives addressed most of these issues on the earnings call, it’s become harder for the company to produce blockbuster results. Case in point: the company’s fourth-quarter sales topped analysts’ estimates by the smallest margin since February 2023, and earnings saw the least upside relative to forecasts since November 2022, according to Bloomberg.

Crypto

Bitcoin's price slumped this week, dropping below the $80,000 mark on Friday and marking a loss of over 25% from its all-time high reached just under six weeks ago. The selloff came amid a broad plunge in the crypto sector, as nervous investors dumped digital tokens and other risky assets following Trump’s latest tariff threats. Case in point: investors withdrew over $1 billion from spot bitcoin ETFs on Tuesday, marking the biggest single-day outflow since these funds debuted in January last year.

Defense

Since returning to the White House last month, Trump has threatened to scale back American military support for Europe’s security while increasing pressure on regional allies to boost their defense spending beyond a NATO target of 2% of GDP, even proposing 5% as a new goal. That has sent shares in European defense companies to new record highs, as investors bet that governments will shoulder more of the burden for the continent’s security by unleashing hundreds of billions of euros in additional military spending. In contrast, US defense stocks have declined this year, with investor confidence shaken by Trump’s remarks about halving the American defense budget, the Defense Secretary’s plan to cut projected military spending by 8% next year, and Elon Musk’s X posts criticizing F-35 fighter jets. (Musk heads the newly created US Department of Government Efficiency).

As Europe ramps up defense spending, it's worth considering the impact on its economy. See, government spending is one of the four major components of GDP. Logically, then, more military spending leads to higher economic growth. But the relationship isn’t that quite simple. Governments, ultimately, have finite budgets. So increased outlays on tanks, personnel, and military equipment generally have to be offset by lower spending elsewhere.

And because more money allocated to defense usually means less devoted to areas like infrastructure or education, some people argue that an increase in military spending can actually be harmful to long-term growth and development. But again, the relationship isn’t that simple. A study by The Economist found no consistent relationship between military spending and economic growth for the 38 mostly wealthy countries in the OECD.

That’s not to say there’s no relationship whatsoever. One study found that military spending in poorer countries often comes at the expense of economic expansion, whereas in more affluent countries, it’s more likely to stimulate it. There are two possible explanations for this. First, weaker oversight in developing countries makes big military budgets a juicy target for corrupt officials. Second, in poorer countries, military spending has a higher “opportunity cost”, since it takes funds that might otherwise go to education, infrastructure, and other growth-producing areas. For richer, more developed countries, the opportunity costs are lower.

But there’s also another part of the economy that bigger military budgets can support: employment. And we’re not just talking about active military personnel, but also all the people employed by the industries militaries rely on, like weapons manufacturing, logistics, and so on. This is becoming an even bigger theme these days as European countries look long-term and invest in domestic weapons industries, rather than relying on manufacturers in the US.

In terms of market impact, those booming military costs have to be funded somehow, and that usually means bumping up government borrowing. And, the more government bonds are issued, the higher the yields they command. So there’s a direct impact on the fixed-income market and an indirect impact on other markets – since those higher yields may pull investors away from stocks, crypto, and other risky assets.

There’s another, more abstract potential impact here too: the idea that higher military spending might reduce the risk of conflict. It’s a lot more subtle and harder to measure, of course, but think of it like this: when a government spends big on its military and defense, it pays “dividends of deterrence”. That is, it makes the country less likely to be invaded or caught up in a war that causes its economy and markets to plunge. That’s important: a key element in any successful economy, after all, is the peace and stability that give people and businesses the confidence to invest.

Next week

1. Monday: Eurozone inflation (February).
2. Tuesday: Eurozone unemployment (January). Earnings: CrowdStrike.
3. Wednesday: Nothing major.
4. Thursday: European Central Bank interest rate decision, US trade balance (January), eurozone retail sales (January). Earnings: JD.com, Broadcom, Costco.
5. Friday: China trade balance (February), US labor market report (February).
6. Sunday: China inflation (February).