7 February 2025
Weekly Market View
The “Tariff man” or
‘The Art of the Deal’?
US President Donald Trump calls himself a “Tariff man”. He is also the author of a 1980s bestseller ‘The Art of the Deal’. For investors assessing which of the two facets of the US president will dominate his second term, his first two weeks suggest tariffs will play a more prominent role this time, likely causing market volatility.
Although markets are likely to restrain his more ambitious agenda, rising trade uncertainty reinforces the need to maintain a diversified foundation allocation, with a preference for US assets and gold.
China’s low-cost AI model DeepSeek is a wake-up call for US tech giants to make their AI investments more efficient. History shows low-cost technological breakthroughs increase the size of the pie. We see room for rotation within the technology sector, likely benefiting software and infrastructure sub-sectors.
While US tariffs are a near-term threat, China’s technology sector is likely to be a long-term beneficiary of wider AI adoption, reinforcing our bullish view on the Hong Kong Technology index.
What are DeepSeek’s implications for global equities?
Do you expect JPY to extend this year’s outperformance vs. other G10 currencies?
What are the implications of India’s annual budget for domestic equities?
Charts of the week: When gold shines…
Gold’s outperformance over the past year and year-to-date reflects heightened uncertainty around US policy
Performance of key asset classes, 12m and year-to-date return
US government bond yields and S&P500 index in 2018-19*
Source: Bloomberg, Standard Chartered; *Indicates market impact of trade war during Trump’s first presidency
Editorial
The “Tariff man” or ‘The Art of the Deal’?
US President Trump calls himself a “Tariff man”, extolling the virtues of protectionist duties to tackle US economic and social challenges. He is also the author of a 1980s bestseller ‘The Art of the Deal’ which provides insight into the way he thinks about business dealmaking. For investors assessing which of the two facets of the US president will dominate his second term, his first two weeks suggest tariffs will play a more prominent role this time, likely increasing market turbulence this year. Although markets are likely to eventually restrain his ambitious agenda, rising uncertainty reinforces the need to maintain a diversified foundation allocation, with a preference for US assets and gold. Alternative assets such as private equity and debt and real estate, thanks to their historically low correlation with equities and bonds, should also help reduce portfolio volatility.
‘Tariff man’ strikes: The US president, after indicating on inauguration day he may go soft on tariffs, imposed stiffer-than-expected 25% import duties on Canada and Mexico. He then postponed the duties for a month after his counterparts pledged tighter border controls. Trump’s 10% additional tariff on imports from China stands, doubling the average tariff rate to 20%. China has retaliated with targeted tariffs and started anti-trust investigations on some US technology leaders. Meanwhile, Europe’s leaders have been warned stiff tariffs are coming.
Vulnerable trade partners: US trading partners are more vulnerable to US tariffs today, compared with Trump 1.0, as the size of the US trade deficit has almost doubled since the start of the pandemic, led by deficits with the EU and Mexico. Almost a third of Mexico’s GDP, a fifth of Canada’s GDP and a fifth of EU’s global exports come from exports to the US. This gives the US president more leverage to use tariffs as a powerful negotiating tool to extract concessions. This is consistent with our Overweight stance on US assets in our portfolios.
US policy uncertainty spurs gold to record high. Gold has risen 9% this year, making it the best performing major asset class. If the announced tariffs against Canada, Mexico and China stand, the effective US tariff rate will soar to c. 10%, the highest since 1946, from 2.3% currently. Studies show tariffs boost short-term inflation but hurt medium-term growth. Using Fed models from Trump’s first term, Bloomberg Economics estimated the proposed tariffs, if passed through to consumers, could lift US core inflation by 0.7% and cut US GDP by 1.2%. However, supply disruptions (especially to auto and energy sectors), retaliation from trade partners and USD moves mean the actual impact could vary significantly. The uncertainty is likely to keep the Fed on hold for now and gold well bid.
Tariffs as a revenue source: Unlike Trump’s first term, tariff proceeds are likely to be a key component of funding proposed tax cuts. Investors are waiting for Treasury Secretary Scott Bessent, a proponent of measured tariffs, to lay out his tax plans. Elon Musk’s ability to cut government spending will also determine how much taxes can be cut without unsettling bond markets. An ambitious programme to deliver most of Trump’s tax cut promises made during the election would require tariffs to be more widely used and be longer lasting.
Restrained by Mr. Market. Trump’s quick reversal on Canada and Mexico tariffs after US equities sagged suggests markets are likely to remain vital constraints on Trump’s policies. Almost 40% of S&P500 companies’ revenues and 57% of technology sector revenues are sourced from abroad, leaving them exposed to trade disruptions. While this should give investors some assurance against extreme policies, it emphasises the need to balance traditional portfolios with gold and alternative assets to moderate volatility.
China likely to counter with fiscal stimulus. The additional 10% tariff on China is likely to directly reduce its GDP growth by c. 0.5%, but the indirect impact is likely to be greater. Although China has reduced its direct exposure to the US via exports in recent years, it is more reliant on global trade. It also faces deflation challenges at home. We expect Beijing to ease fiscal and monetary policy in the coming weeks to counter the impact of US tariffs. Authorities have kept the currency stable through daily FX fixing, sustaining the possibility of a trade deal.
The weekly macro balance sheet
Our weekly net assessment: On balance, we see the past week’s data and policy as negative for risk assets in the near-term
(+) factors: US manufacturing recovery
(-) factors: US, China services slowdown; US-China trade tensions; cautious Fed
US manufacturing recovered in January, but services slowed; job openings remain on downtrend, suggesting a cooling job market
US ISM manufacturing and services PMIs; JOLTS job openings
Euro area inflation remains sticky, although weaker growth and trade uncertainty is likely to allow the ECB to keep cutting rates
Euro area headline and core inflation
China faces increasing urgency to ease policy further as domestic economy remains lacklustre, while exports face rising US protectionism
China’s Caixin manufacturing and services PMIs
Source: Bloomberg, Standard Chartered
Top client questions
What are DeepSeek’s implications for global equities?
The emergence of DeepSeek, a cheap-cost alternative to OpenAI, has profound implications to global technology investing. It will lead to companies emphasising upon the efficiency of AI-investments, i.e. demanding more “bang-for-the-buck” for their AI-investments. Hyperscalers, i.e. large cloud service providers, are likely to remain aggressive with AI spend, though the mix may change. They will likely require more efficient chips and greater compute, as they accelerate AI adoption and the development of “higher-end” areas, e.g. agentic and physical AI.
We believe this is going to increase the “size of the pie” in the AI-industry, which is positive for the long-term, and hence, our stance to buy on dips in the broader US technology and communication services sectors. However, in the near-term, there is likely to be volatility ahead still in specific industries or stocks. Thus, within the technology sector, investors should use the “scaling-in” approach, to areas such as semiconductors and related equipment, where we expect valuation multiples to compress.
We also expect rotation within the technology sector. Software companies will likely benefit more, due to the Trump effect, e.g. no tariff headwinds, increased M&A, and AI monetisation. Large software-as-a-service providers with access to customer data will benefit from the emergence of low-cost solutions such as DeepSeek.
We remain overweight US equities. 5,800 is a key support for the S&P 500, followed by 5,650. Of the 58% of US companies that have reported Q4’24 results, 76% beat earnings expectations, above the “average beat” of 67%. Q4’24 earnings growth forecast has gone up to 12.7% y/y from 9.6% in the beginning of 2025. 9 out of 11 sectors delivered positive earnings surprises, led by Financials and Communications. The guidance from mega-cap growth companies has been mixed, citing headwinds from the USD and capacity additions from cloud growth, but we believe demand outlook remains healthy.
From a global perspective, Chinese technology companies linked to the development of AI will likely benefit. We have seen a slight rotation into Chinese equities since the end of Jan-25. While the trade war is a key macro risk, DeepSeek is a positive surprise for Chinese equities, narrowing the discount of Chinese equities vs. global ones. We expect this to push up the floor of the Hang Seng Index to the 20,000 level. In summary, we recommend a core allocation into China within our Neutral stance in Asia ex-Japan equities, advocating a “barbell approach” of positioning into high-dividend non-financial state-owned enterprises and the Hang Seng Technology Index.
— Daniel Lam, Head, Equity Strategy
US financial and communication services sectors have led earnings surprises in the Q4 2024 reporting season
Earnings surprises of S&P 500 sectors in Q4’24
LSEG I/B/E/S, Standard Chartered
The Hang Seng Index’s likely technical support level has risen to the 20,000 level
Hang Seng Index
Source: Bloomberg, Standard Chartered
Top client questions (cont’d)
What are the implications of India’s annual budget for Indian equities?
India’s annual budget for 2025 attempts to boost growth while staying on the path of fiscal consolidation. A sizeable income tax cut (~0.3% of GDP) for individuals with annual incomes below INR 1.2 mn was a positive surprise. Other key announcements included
1) measures to boost employment and income through increased outlays for key employment sectors – agriculture, tourism, exports, and enhanced credit support for small-and-medium businesses and individuals; 2) increased deregulation to facilitate doing business, including tax rationalisation, rationalisation of duties and export tariffs, and incentivisation for energy distribution and transmission reforms; and 3) fiscal deficit set at 3.5% of GDP and central government debt-to-GDP ratio at 50% by FY 2031.
In our view, the budget sets a floor for GDP growth amid a cyclical slowdown. Improved discretionary spending power of consumers could drive a pick-up in private consumption. The focus on public-private-partnership (PPP) could boost private capex.
We find the budget supportive of our preference for Indian equities over a 12-month horizon. The market’s valuation has eased, with the Nifty index 12-month forward P/E falling to 19x from September 2024 peak of 21x. Additionally, India is less prone to the intensifying tariff war. While volatility may remain elevated in the near-term, we would adopt a buy-on-dip strategy to add the asset class.
— Ravi Singh, Chief Investment Strategist
Indian budget stuck to its fiscal consolidation path while providing a growth boost
Key numbers from the Budget
Do you expect JPY to extend this year’s outperformance against other G10 currencies?
JPY has been the strongest currency among G7 since the start of the year. USD/JPY has fallen 3.2% year-to-date. Notably, Japan’s inflation-adjusted real wages rose 0.6% year-on-year in December, driven by winter bonuses. Markets continue to price BoJ rate hikes, with 30 bps expected by year-end. Meanwhile BoJ board member Naoki Tamura suggested rates should rise to around 1% by the fiscal year ending March 2026. We consider the pair likely to test support at 149.2 and the yen to appreciate on the back of further hawkish comments amid potential tariff-related developments. We prefer to express this against commodity currencies.
Australia’s underlying inflation fell from 3.6% to 3.2% y/y in the December quarter and retail sales softened m/m. The market is pricing in 90 bps of RBA rate cuts by year-end. With expectations of a dovish RBA tilt next week, we have a bearish stance on AUD/JPY. A firm break below 93.59 is likely to edge towards 90.15.
— Iris Yuen, Investment Strategist
We expect further AUD/JPY downside
AUD/JPY and technicals
Source: Bloomberg, Standard Chartered
Top client questions (cont’d)
What’s the outlook for GBP/USD after the BOE policy meeting?
The BoE cut its policy rate by 25bps as the market widely expected, marking the lowest level since June 2023. However, two officials backed a 50bps cut, fuelling market expectations of further easing, which is supported on the UK fundamental front: unemployment climbed, core inflation fell from 3.5% to 3.2% in December, and consumer confidence fell more than expected in January.
However, the retreat of UK gilts since mid-January and the tax rise are likely to alleviate the UK government debt stress. We expect to see some fiscal stability, which will support the GBP in the coming months. Additionally, GBP is less sensitive to tariff, along with neutral technical signals. Hence, GBP/USD is likely to be rangebound between 1.2100-1.2810 in the next 3 months.
— Iris Yuen, Investment Strategist
GBP/USD is likely to be rangebound
GBP/USD with technicals
Source: Bloomberg, Standard Chartered
What are the implications of the US Treasury Department’s quarterly refunding announcement? What is your expectation for the term premium?
The US Treasury, as anticipated, maintained a stable refunding plan in its February 5 announcement. However, uncertainty remains regarding how the expected tax cuts under the Trump administration will be funded. Generally, the market expects the US Treasury to have enough leeway until the third quarter of 2025 to utilize accounting measures and draw on its cash balance to avoid a debt-ceiling breach, thereby keeping volatility in check.
The US 10-year yield has retreated from a high of 4.8% in mid-January to below 4.5% following the lower-than-expected CPI print and weaker January ISM Services Index. Yield volatility remained contained earlier this week amid the ongoing tariff disputes. Similarly, the US Treasury 2-year to 10-year spread has flattened from 42bps to the current 23bps.
We expect the 10-year yield to be in the range of 4% to 4.25% in 6-12 months and anticipate three cuts to the Fed funds rate in 2025. This implies that the term premium, the extra interest rates an investor would demand to lend their money out for a longer time, will remain relatively stable while the yield curve shifts lower. We reiterate our recommendation for investors to lock in current yields given our view that interest rates will move lower from the current higher levels.
— Ray Heung, Senior Investment Strategist
US 10-year government bond yield has fallen below 4.5% amid growth concerns as trade uncertainty rise
US 2-year and 10-year government bond yields
Source: Bloomberg, Standard Chartered
Market performance summary*
Sources: MSCI, JP Morgan, Barclays Capital, Citigroup, Dow Jones, HFRX, FTSE, Bloomberg, Standard Chartered. *Performance in USD terms unless otherwise stated 2025 YTD performance from 31 Dec 2024-6 Feb 2025; 1-week period: 30 Jan-6 Feb 2025
Our 12-month asset class views at a glance
Economic and market calendar
The S&P500 has next interim resistance at 6,217
Technical indicators for key markets as of 6 Feb close
Investor diversity has normalised across asset classes
Our proprietary market diversity indicators as of 6 Feb close
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