As expected, numerous executive orders have already been issued since the change of administration in the U.S. These aim to strengthen and expand the country's dominant position within the international power structure. Tariffs have already been imposed on Canada, Mexico, and China at various rates, with additional measures against the EU being threatened. According to the U.S. government, the purpose of these tariffs is twofold: to stimulate domestic investments and production, thereby supporting the labor market, and to reduce the trade deficit, freeing up resources for other economic measures such as tax cuts. Research suggests that tariffs can temporarily protect certain industries and their jobs. However, potential long-term negative effects may arise, including higher consumer prices due to increased costs of imported goods and reduced growth due to diminished competition and innovation. The full impact of these tariffs on the global economy, which countries may be targeted next, and the extent of the measures remains to be seen, as do the reactions from affected nations.
The equity markets started the year on a strong note, continuing the trend of the past two years. However, investor sentiment cooled in mid-January, driven by rising interest rates, inflation concerns, and the Federal Reserve's cautious approach to rate cuts. After a brief market recovery, further volatility was triggered by the Chinese startup DeepSeek, which unveiled its AI model. DeepSeek claims that its model rivals ChatGPT in performance while requiring significantly fewer resources for training. Fears surrounding the heavy AI investments by various companies caused a temporary sell-off in AI-related stocks. By the end of January, an unusual picture emerged with European stocks leading the pack globally.
Amid inflation concerns, U.S. interest rates spiked significantly during the first two weeks of January. The yield on 10-year U.S. Treasury bonds temporarily exceeded 4.8%, over 25 basis points higher than at the beginning of the year. Unlike in many other countries, U.S. rates subsequently eased back to early January levels, partly influenced by the U.S. President’s call for rate cuts—comments that the Federal Reserve disregarded, leaving rates unchanged. A similar pattern occurred in the U.K., while long-term yields in Germany, France, Japan, and Switzerland rose. Precious metals had a strong month, with gold up 6.6% and silver rising 8%. The U.S. dollar remained largely stable against the Swiss franc (+0.4%), while the euro gained 0.4%, and the Japanese yen appreciated 1.7%. Conversely, the British pound fell by 0.6%.
Recent developments have underscored how seemingly minor events can have major impacts. Until recently, few had the Chinese company DeepSeek on their radar. The release of its R1 model highlights the challenge of maintaining a competitive edge over time. It also illustrates the risks of a highly concentrated stock market: the five largest stocks, all strongly tied to AI, now account for nearly 20% of the global market. In this environment, a well-diversified, long-term strategy remains prudent. We continue to favor equities but maintain asymmetric hedges due to elevated valuations in some market segments. The protectionist stance of the U.S. government and the Federal Reserve’s hesitation to cut rates suggest that higher consumer prices are a realistic scenario. Accordingly, we remain cautious on nominal assets and are increasingly turning to alternatives such as precious metals.