ASX Market Update 3rd February 2025
Global Market Commentary
Chart: S&P 500 as at 31/01/25
There is a saying that a week is a long time in football, meaning so much can change from game to game. Well, a week can last an eternity in financial markets. I only wrote to you a few days ago and so much has happened in that time I thought it was important to get you a short note out to explain it all.
Last Friday Trump indicated he was going to place Tariffs on Canada & Mexico as he had promised in his day one address. Over the weekend this came to fruition with 25% tariffs placed on all goods from Canada & Mexico, 10% on Canadian energy imports and 10% increase to Chinese Tariffs. Canada immediately responded placing a 25% tariff on all goods imported from the US. Trump also indicated EU tariffs are coming as well. None of this is new information to markets as Trump has been warning us of these policies for some time. What it does create is volatility in equity markets as we saw on Friday night with the S&P500 up almost 1% and ending up down 0.5% on the back of this news. Futures indicated the S&P500 & Nasdaq will fall 2% tonight when trade opens. So, what does this mean for markets and economies?
Chart: US Dollar Currency Index (DXY) as at 03/02/25
The headlines suggest that this is immediately inflationary, using simple person economics, prices go up, that causes inflation. This couldn’t be further from the truth. The fact is the path forward isn’t 100% clear and probably points towards a less inflationary impact than anyone would have us believe. If we look back at the last time Trump imposed tariffs on China, we saw no inflationary impacts. The reason its not straight forward because there are other mitigating factors. These factors are discussed below.
1. Currency- This is probably the most influential and really was the reason we saw no inflationary impact last time. A strong USD will decrease most if not all inflationary impacts of the tariffs. Last time around the USD increased 15% against the yuan, basically cancelling out the 17% effective tariff rate placed upon them. It was the Chinese population that wore the brunt of higher prices as its currency depreciated. Already we have seen the Mexican Peso fall almost 20% vs USD in the last 6 months and the CAD -10% in anticipation of these policies. They have fallen a further 2% today as well. If the USD remains strong vs other currencies (as the chart above depicts), then the net effect could be zero.
2. Prices not passed on- Companies could choose not to pass price rises on to consumers. Again, according to a study by the IMF on 100,000 items, we saw this last time, in sectors where price rises did occur, those increases were not passed on. Granted these would have been minimal, but they just absorbed them and wore it as lower margins. Given how the US consumer is averse to taking on price increases these days, due to rampant inflation since covid, I dare say this could play out again.
3. Substitution- Consumers may substitute the costlier goods for a cheaper product therefore negating any price increase. Again, a common practice in consumer markets that will impact price inflation.
As you can see there is no simple conclusion, and we may not see the impacts of tariffs flow through to macro data for some time, if at all. It can also be negative for growth, but again we really didn’t see that last time around. Businesses and consumers may hold off on purchases for fear of what may come or because they have front-loaded purchases before the tariffs were implemented as we saw in Q4 of last year. It should have short lived impact though.
The last conundrum is what happens to the Fed and rates. Last time around the Fed said they would look through tariffs as they really are a one-time inflationary impact and do not force prices up continuously. Like when the GST was implemented here. We saw a couple of quarters of inflation but then it quickly returned to normal. For it to be truly inflationary then prices need to keep on rising. That’s not how tariffs work.
In my view the inflationary threat is minimal due to the factors above and perhaps mostly factored in as we have seen yields and USD rise strongly in the last 3 months. The equity markets are likely to react to headlines in the short term rather than actual macro data. The threat is the uncertainty around retaliation from Mexico, further tariffs on the EU and their response and further increased tariffs in Canada, Mexico & China. All of these are in play. This is why I warned of the volatility we would see in markets in 2025, especially in the first half.
There could be real positives for the US because of the tariffs. Increased revenue for treasury and a reduction in the deficit is the main one. Last time the Chinese tariffs brought in enough income to cover 1/3rd of the tax cuts Trump implemented. It could also help increase US manufacturing and jobs growth as consumers look at locally manufactured goods. Also, tariffs shouldn’t have the impact on prices moving forward they may have once done decades ago. The main reason you import a good is because it can be made cheaper in another country. This is mainly because labor is so much cheaper abroad. Automation has become a large part of the manufacturing process in many sectors and replaced a lot of workers along the way. Automation is only going to grow and thus in theory a product made in the US, outside of initial upfront capital costs, may in fact cost the same to produce on a net basis.
S&P/ASX 200
Chart: S&P/ASX 200 on 03/02/25
The XJO is seeing heavy losses in reaction to US futures and the tariff news. This was to be expected. Overall, the XJO remains in a bullish trend and the focus will be on the local earnings season that has just kicked off with particular attention to company commentary surrounding consumer spending habits. The US Q4 earnings season will also be a major driver of our markets. I will cover a few earnings reports the next time I write to you.
Nvidia + DeepSeek Update
Chart: Nvidia revenue from Singapore courtesy of @kobeissiletter on X
In an update on the continuing saga surrounding DeepSeek and its impact on the US AI sector we have seen some excellent research conducted by Kobeissi Letter over on X. Their claim is that DeepSeek, and other Chinese companies, are importing restricted NVDA chips via Singapore. To qualify as a buyer, you simply need just a mailing address in Singapore. Guess who has a mailing address in Singapore.
There has been a 740% increase in sales to Singapore since DeepSeek was founded and it now accounts for 20% of NVDA revenue. This has major implications as it further weakens DeepSeek’s claims that they were able to train and build their AI LLM for only $6mill. It also means 20% of NVDA revenue is threatened because US authorities are now investigating these claims and if found to be true likely to place heavy restrictions on Singapore.
Overall, it’s still a net positive to NVDA and the US AI sector. It shows the capital-intensive nature of AI development is still true, although it’s continuously improving and becoming cheaper. Thus, the threat of less demand for NVDA chips is reduced. We also heard from MSFT last week during their earnings call stating they had around $300bill in future revenue in demand being bottlenecked by data centre capacity limitations. In addition, Meta announced that they would be increasing capex spending as well throughout 2025/26. The overall message and sentiment from big tech thus far have been that it doesn’t change any plans in terms of their capex spending even if DeepSeek’s model was legitimate. This is mainly because the sheer growth and scale of inference will outstrip any lower costs. It has also been shown that DeepSeeks model shifts the compute power from the training side to the inference side of the equation. This means that the same compute power is still needed, it just comes from the user instead of the provider in this instance.
NVDA share price performance is still likely to be capped due to risks associated with Singapore and the market wanting to see that demand is sustained. However, if NVDA’s share price continues to fall it will become attractive at some point. Overall, as I said last year, this will force investors to spread the breadth of their AI exposure to other companies.
I tried to keep this one a bit shorter given the turnaround since my last note, so I hope you have benefited from it still. We are certainly in for a volatile period in markets which, as we all know, create opportunities. It will be handy to have some capital ready to deploy if this is the case. Hope you all have a great week and try and stay cool. Look forward to speaking to you all soon. Go Crows!
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Important Notice
Heath Moss is an Authorised Representative (AR 278605) of PGW Financial Services Pty Ltd AFSL 384713. Any advice in this article should be considered General Advice only and does not consider your personal needs and objectives or your financial circumstances. You should therefore consider these matters yourself before deciding whether the advice is appropriate to you and whether you should act upon it. I am happy to assist you in this process. To do so, I will need to collect personal and financial details from you before providing my recommendations. Please note the author may own shares in the companies mentioned in the above blog.
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