Trump Tariffs Shake Markets

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

1. Trump announced 25% tariffs on steel and aluminum imports.
2. The President also unveiled a “reciprocal” tariff plan.
3. US inflation unexpectedly accelerated.
4. The UK economy grew by more than forecast.
5. Big Tech’s huge spending on AI is set to continue in 2025.
6. Chinese tech stocks are back in vogue.

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

Trade War

Another week, and another trade war escalation. US President Donald Trump announced on Monday that he’s imposing tariffs of 25% on all steel and aluminum imports into the US – including finished metal products – in a bid to protect politically important American industries. The levies, which are set to take effect on March 12, threaten to unleash turmoil in commodity markets and ignite trade wars across the globe. The move could also sharply raise costs for American manufacturers that import the metals and, ultimately, for consumers. After all, the US is very reliant on aluminum imports to meet domestic demand. And although foreign steel represents a smaller portion of overall consumption, the aerospace, auto manufacturing, and energy sectors rely heavily on imported specialty grades.

A few days after announcing the steel and aluminum levies, Trump unveiled a sweeping plan to impose “reciprocal” tariffs on America’s trading partners. More specifically, the US President directed his top trade advisers to develop new tariffs on a “country-by-country” basis in retaliation against levies, regulations, value-added taxes, and subsidies deemed unfair by his administration. Analysts warned that trading partners like Brazil, India, Japan, Canada, and the EU were most at risk of being hit by the extra tariffs, which could be imposed as early as April.

However, the decision not to enforce tariffs right away could also be seen as an opening bid for negotiation, similar to the strategy Trump previously employed to secure concessions from Mexico, Canada, and Colombia, rather than indicating a definitive commitment to implement them.

US Inflation

Annual inflation in the US accelerated from 2.9% in December to 3% in January – the highest level since last summer and defying economist forecasts for an unchanged reading. Core inflation, which strips out volatile food and energy items to give a better idea of underlying price pressures, also accelerated, reaching 3.3% and disappointing analysts who were expecting a small dip. On a month-over-month basis, headline and core inflation also surpassed estimates, coming in at 0.5% and 0.4%, respectively. The monthly headline figure was the highest since August 2023.

The hotter-than-expected report hit stocks and government bonds on Wednesday. After all, signs of accelerating inflation, combined with the robust state of the US labor market, bolsters the case for the Fed to proceed slowly with interest rate cuts. Traders are now betting that the central bank will lower borrowing costs just once this year. Before the publication of the data, they had expected the first cut to arrive by September, with a 50% chance of a second reduction by the end of the year.

UK Economy

The UK finally got some good news, with new data this week showing the British economy grew by 0.1% last quarter from the one before, defying forecasts for a 0.1% contraction and marking a small acceleration from the zero growth seen in the third quarter. The better-than-expected showing was mainly due to a strong performance in December, when economic growth expanded by 0.4% from the previous month, driven by the UK’s dominant services sector. However, when accounting for population increases, the picture was more disappointing, with GDP per capita falling 0.1% last quarter – the second consecutive decline.

For 2024 as a whole, UK GDP grew by 0.9%. The Bank of England expects the economy’s weakness to spill over into 2025, and last week halved its growth forecast for this year to just 0.7%. But the better-than-expected GDP figures last quarter will come as a slight relief to the central bank as it weighs sticky inflation against the need to support the economy.

Big Tech

The AI boom has forced tech companies to replace their post-pandemic cost-cutting programs with huge, investor-approved spending on data centers. Microsoft, Alphabet, Amazon, and Meta’s latest results, for example, showed that they spent a combined $246 billion in 2024, representing a 63% increase from the year before. And the four tech firms project capital expenditures could exceed $320 billion this year, as they ramp up their investments while dismissing investor concerns about the huge sums being bet on the nascent technology. After all, amid the hype about AI’s transformative potential, shareholders worry that doubling down on spending could eat into capital that might otherwise be returned through buybacks and dividends, while also diverting resources from non-AI business lines.

There’s another problem that comes with tech firms’ expensive gamble on AI: if it doesn’t pay off, the increased investment could weigh on their profit margins for years to come. See, when a business buys a big-ticket item, the depreciation – the value the item loses each year – counts as an annual expense in subsequent years. That means Big Tech’s massive splurge on data centers will show up in rising depreciation expenses down the road, which could dent profit margins unless revenue increases by an equal amount.

Chinese Tech Stocks

Adding to investors’ concern, Chinese AI firm DeepSeek shocked Silicon Valley in late January after it released a large language model developed on a modest budget, raising questions about the need for huge investment in AI. While the news led US tech stocks to slump, it ignited a rally in Chinese ones, with investors betting that cloud computing and tech hardware companies in the country will benefit from DeepSeek’s AI advancements. Case in point: the Hang Seng Tech index, which tracks the 30 biggest tech firms listed in Hong Kong, is up 25% from its 2025 low on January 13, marking the start of a bull market and trouncing the Nasdaq 100 during the same period. The positive momentum is a boon to China’s markets, which have been hit by concerns over Trump’s tariffs, an ongoing property slump, and deflationary pressures in the economy.

Next week

1. Monday: Japan GDP (Q4).
2. Tuesday: UK labor market report (December), eurozone economic sentiment (February). Earnings: Baidu, Medtronic, Arista Networks.
3. Wednesday: UK inflation (January), minutes of the Fed’s latest meeting.
4. Thursday: China loan prime rates announcement, eurozone consumer confidence (February). Earnings: Alibaba, Walmart, Block, Booking Holdings.
5. Friday: Japan inflation (January), UK retail sales (January), US consumer sentiment (February), global PMIs (February).