A week that had everything
If ever there was a week that had everything, this was it. A market-shaking AI panic, a U.S. Federal Reserve (the Fed) decision, a Bank of Canada rate cut and fears of a looming trade war, all within days of each other.
The AI-driven rout in tech stocks set the tone. A weekend buzz about China’s DeepSeek R1 AI model sent shockwaves through markets, as investors questioned whether the tech giants’ massive capital expenditure could slow down. Analysts noted that DeepSeek’s AI platform offers performance comparable to leading Western models but developed at a fraction of the cost, forcing investors to reconsider the dominance of the huge tech companies. The fallout was swift: the Magnificent Seven all dropped in value, while former market leaders like Nvidia and Broadcom were hit especially hard. There’s now a likelihood that AI infrastructure will be cut back, with more money being put into AI applications, though large cloud service providers are unlikely to slow down their AI investment charge just yet. Nvidia, after a brutal 17% drop on Monday, managed a partial recovery later in the week, but the question of AI valuations remained front and centre.
The Fed’s rate decision added to the drama. Its statement was quite negative as regards the likelihood of future cuts, with Fed chair Powell highlighting labour market strength and removing references to inflation progress. He softened the tone during the press conference, however, clarifying that the inflation language change wasn’t meant to signal a policy shift and reiterating his expectation for continued progress on inflation. While Powell deflected questions on potential policy shifts under Trump, markets remained on edge as fiscal, tariff and immigration policies remained wild cards. Recent inflation data has surprised to the downside, while growth has remained stronger than expected, which will probably reduce the chances for quicker or more numerous rate cuts.
Meanwhile, the Bank of Canada (BoC) extended its easing cycle, cutting rates by 25 basis points (0.25 of a percentage point) to 3%, while ending its quantitative tightening program. This marks the sixth straight rate cut, though the pace is slowing following back-to-back 50 basis-point reductions in October and December. Governor Tiff Macklem acknowledged that monetary policy had helped restore price stability but warned that Trump’s trade war threats could significantly alter the inflation outlook. The BoC’s accompanying report highlighted the risk of weaker economic growth in 2025 due to lower immigration targets, with GDP projections revised downward to 1.8% for 2025 and 2026. The bank also cautioned that widespread tariffs would be a major test for Canada’s economic resilience; while lower demand could push inflation down, higher input costs and supply chain disruptions would add new inflationary pressures.
And the wildcard is Trump’s trade war rhetoric, which is approaching the deadline. With both central banks now in data-dependent mode, this emerging trade conflict is the biggest unknown heading into next week. Markets are being forced to recalibrate a lot, all at once: AI capital expenditure assumptions, Fed policy expectations and trade war risks. We can expect another eventful week to start February.
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