January 2025 Market Report

Despite both bonds and equities yielding positive returns, January was volatile for investors. The Trump administration announced its first round of tariffs, with more expected in the ensuing weeks and months. Meanwhile, a relatively unknown Chinese start-up entered the artificial intelligence arms race. After a better-than-expected inflation report, traders expect the RBA to cut interest rates by 25 basis points in February.

Global Markets 

President Donald Trump resumed control of the White House and wasted no time legislating his “America First” policy agenda. Numerous executive orders were signed on his first days in office focused on culling red tape and promoting US exceptionalism. Notably absent however was the tariff policy that defined his election campaign.   

Source: US Census Bureau

Then in the final trading days of the month, and officially enacted on February 1, the administration announced 25% tariffs on top trading partners Canada and Mexico, in addition to a further 10% excise duty on Chinese goods.

In the interest of keeping this update relevant to readers, Trump paused the implementation of the tariffs on Canada and Mexico for 30 days after the two nations agreed to implement measures to prevent illicit drug trafficking and illegal migration.

Still, equity markets responded negatively to the potential for a global trade war. The tariffs appear to be a negotiating tool, with the twin objective of extracting concessions from trade partners and encouraging domestic industry, jobs and investment. Trump has however suggested they may be permanent to fund lower income taxes.  

Complicating matters further is that the tariffs are not linked to measurable economic objectives but rather undefined reductions in illegal migration and illicit drugs. Retaliatory tariffs by trade partners are expected.

Given Trump’s previous comments, more industries and countries are likely to be targeted – but we don’t know who, when or for how long.

Markets seldom enjoy uncertainty, and the net result will be heightened volatility for investors.

Volatility was further exacerbated by the emergence of a relatively unknown Chinese start-up called DeepSeek and its artificial intelligence language model seemingly on par with the likes of ChatGPT.  

The firm said the model took less than two months to build and cost under US$6 million, a tiny sliver of the large Western technology companies are spending on their respective artificial intelligence projects. 

Analysts have challenged the accuracy of those cost figures, but the efficacy of the model, in addition to the inferior chips available to Chinese companies (due to export controls from the US) broke the prevailing narrative that you need significant computing and financial resources to compete in the artificial intelligence arms race. 

The narrative shift erased US$600 billion from chipmakers NVIDIA’s market cap, with the share price collapsing 17% in a single day. To put that in perspective, Commonwealth Bank’s entire market cap is around US$165 billion.

The fall rippled also through indexes, namely the S&P 500 and Nasdaq 100, which underperformed equity markets in Europe, the UK and Australia where technology companies have a smaller weighting.  

The strong market reaction highlights the importance of prudent portfolio weighting and diversifying risk across both geographies and asset classes.

After three successive interest rate cuts totaling 100 basis points, the US Federal Reserve kept rates on hold at its January FOMC meeting.  Chairman Jerome Powell said the Board would not be in a hurry to adjust policy further and acknowledged that reducing “too fast or too much could hinder progress on inflation.”

Gold prices continued their upward march, closing 7.8% higher at US$2,812 – slightly below its all-time high. Investors continue to seek safe havens, no less because of the uncertainty surrounding further tariffs from the US. Commodities also performed well, with the Bloomberg Commodity Index finishing the month 4% higher.

Australian Markets 

The local S&P/ASX 200 benchmark added 4.6% in January, buoyed by the increased likelihood of an interest cut in February. Traders moved quickly to position for a February interest cut by the Reserve Bank of Australia (RBA) after the latest inflation release undershot expectations.

Source: J.P. Morgan

The December quarter consumer price index fell to 2.4%, down from 2.8% in September and importantly settling near the middle point of the central bank’s 2-3% target band. Core inflation, the bank’s preferred metric that removes volatile basket items, fell to 3.2%.

The RBA will also be pleased that non-discretionary inflation is now growing less than discretionary inflation for the first time since June 2021. Still, cost pressures linger. Insurance (+11.0%) and rents (+6.4%) are two line items the RBA will follow closely. 

Australian bond yields were relatively unresponsive to the domestic inflation print. Instead, bond yields fell rapidly after the release of the better-than-expected inflation figures out of the US. Australian 10-year Government Bonds exceeded 4.6% during the month but retracted to settle at 4.44%.

The RBA will meet on February 18 to announce its next policy decision. 

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