- Last week, equities rallied as Fed rate cut expectations rose.
- A Chinese company unveiled a low-cost, free AI model.
- The market focus is shifting to the upcoming FOMC policy meeting.
Equities collapsed on Monday, reversing last week’s rally as risk appetite dropped after reports of a new low-cost Chinese AI model. Moreover, Trump announced tariffs on specific goods, increasing the risk of trade wars. Investors eagerly await the FOMC policy meeting for clues on future moves.
Last week, Trump failed to give any clear guidance on tariffs. Instead, he softened his tone on China, saying the two countries could agree on better trading terms to avoid duties. Moreover, Trump called on the Fed to lower borrowing costs, surprising investors.
Despite his aggressive tone during the campaigns, the US president realizes the impact of starting a trade war with the country’s major trading partners. As a result, he has remained a bit cautious, waiting for better trade deals.
Equities also rallied as Fed rate cut expectations rose. Notably, US data revealed some economic weakness. Unemployment claims increased, and business activity in the services sector slowed. Lower borrowing costs improve business conditions, boosting stocks.
Semiconductor Index (Source: Bloomberg)
On Monday, equities experienced a red day as investors dumped risky assets and bought safer ones like the yen. There was panic in the market amid news of AI developments in China. Reports showed that a company in China had created a better model that uses lower-cost technology. At the same time, the model uses less data, creating huge competition for US AI models. Investors invested a lot of money in the US AI industry last year. As a result, Nvidia and semiconductor stocks on Wall Street collapsed due to the threat of competition.
Furthermore, there was bearish sentiment due to threats from Trump to impose tariffs. Since he took office, traders have been expecting tariffs. However, the president only reveals a few details, creating uncertainty.
The US president said he would impose duties on specific goods to increase US production. Although this would benefit stocks in the long run, it also increases the risk of trade wars. During Trump’s previous term, a trade war between the US and China caused a lot of turmoil in the equities market. A repeat would likely have the same impact.
Meanwhile, the Fed will likely hold rates on Wednesday. A cautious tone will put pressure on stocks. On the other hand, a dovish tone might revive last week’s rally.
