Investors holding tech-heavy exposure are probably thankful for the Chinese New Year holiday in which mainland China, South Korea, Taiwan, Indonesia, Vietnam and others are closed today allowing something of circuit breaker to the meltdown in the stock prices of AI associated corporations. The flurry of self-doubt in US bourses brought on by China’s AI startup, DeepSeek, and its ability to compete with the likes of ChatGPT with far less computing power and costs, brings into question the high valuation and financing involved in US AI besottedness. Darling Nvidia felt the brunt of the rout by falling 17% in value, nearly $600 billion, a record fall for any individual stock in US market history. This inspired Nasdaq to tumble 3.1% and the S&P 500 by 1.5%, which equates to wipe of nearly a trillion Dollars in US stock market value based on Dow Jones assessments.

The fallout is not over yet, many tech companies are about to announce results and any weaknesses that might have been ignored prior to yesterday’s events will likely find much greater scrutiny. Such levels of investor infection in the premier drivers of wealth creation in stock markets must migrate to other areas of risk, and so it was with a swinging forex market that saw migration into the Yen. Treasury yields fell for the same reason and the US Dollar experienced a backlash, although it has since regained composure due to the forthcoming Federal Reserve rate decision which will likely see a push on the current level.

Oil prices also felt the quiver of flight to quality and as the cold weather in the US eases and sanction talk is replaced by more tariff utterances from the New US President. However, it is interesting to note as we approach futures expiry in Brent that open interest is again on the rise. In April 2020 the record for futures and options stood at nearly 4 million lots, the current level of 3.25 million lots is some way off, but it is curious that at the end of last year it was 2.88 million. It would appear, and despite the recent set back in prices, there is growing commitment to length. Some would suggest that oil is benefiting from inflation hedge buying, which itself is circular for inflation, but the expiry in Brent will allow an insight into whether such a strategy is feasible and if longs have been all about the nearby tightness caused by sanctions and weather. What might make length sit easier is a Bloomberg report this morning of protests beginning at the ports of Ras Lanuf and Es Sider in Libya. If such disorder spreads, which is not unusual when Libya’s oil industry is held to ransom by one group or another, the current NOC evaluated production of 1.4mbpd will come under threat.

Nasty PMIs

Coming in under the radar, for obvious current affair reasons, Hamburg Commercial Bank (HCOB)/S&P released the Flash Purchasing Manager Indices for January and while there are smidgens of hope, the overall picture of activity remains downcast. In order of Manufacturing, Services and Composite, preliminary PMIs for Germany read 44.1, 52.5, 50.1; France 45.3, 48.9, 48.3 and the Eurozone 46.1, 51.4, 50.2. Over the Channel in the UK the S&P/CIPS came in 48.2, 51.2 and 50.9. For those that have wandered away from PMI tracking, the all-important pivotal number is 50, with anything above or below signifying expansion or contraction. Therefore, as much as Germany’s Manufacturing ticket is the highest reading for 8 months, any lower and it would be in need of a defibrillator if compared with a reading of 66.0 in April 2021. The comparison remains appropriate for France which at a similar time in history saw its own Manufacturing PMI just shy of 60.0. Services PMI, so much more important in the UK saw something of renaissance in the Spring of 2024, but bumbled along just above 50.0, whereas, and staying in the same measure of time used for Germany and France, it was well over 60.0 and stayed elevated until January 2022. The choice of data can be accused of being subject to pandemic moves, however, such readings were also seen at the end of the 2010s, the important point is how the economic malaise continues.

One needs only look at GDP growth for 2024, and while data sets are yet to be completed, the UK, France and EU straddle 1% whereas Germany is likely to be a stagnant 0.1%. To give an idea of the poor performances in real GDP, The Telegraph using OECD data, published a table showing GDP change from 4Q 2019 to 3Q 2024. The Eurozone gain for the 5-year period is 5%, France 4%, UK 3% and Germany completely flatlines, a gain of zero. It will come as little surprise that topping the table is the US, achieving a 12% gain and being the yardstick encapsulates the seriousness of Europe and its national constituent’s plight.

In a world full of diverging politics and economic paths, Europe (the UK must be thrown in with its neighbours) lacks the ‘can do’ attitude that the new US President presides over. The fresh administration reaps the rewards of eye-boggling stimulus under Joe Biden, but where pandemic payouts and economic props have been put to good use in an expansive, innovative economy, the Old Continent struggles with paying energy bills post-Ukraine, fears an expansionist Russia, is bogged down in green energy dogma and is traumatised by the rise of right-leaning politics so very apposite at the 80th anniversary of the liberation of Auschwitz-Birkenau. Frankly, it is not even playing anything as close to catch up with the superpower from yonder side of the pond. Referring to the earlier data, and to labour the point, the largest real GDP growth rate in Europe during 2024 was Malta at 5% with even Greece, for so long the ECB’s whipping boy, posting a 2.3% reading. With all due respect to the small Mediterranean island and the seat of western culture, it is not exactly gilt-edged company, and no wonder Europe is deemed an economic basket case.

One wonders if the same plight awaits China. Yesterday the National Bureau of Statistics released its own PMI data. Non-Manufacturing in January barely made expansion at 50.2, but even more worrying for anybody holding hopes that China might revive will be sorely grieved at the Manufacturing count of 49.1 which is full point lower than the anticipated 50.1. The concern is exacerbated by the factory activity not emulating the uptick in GDP at the back end of 2024. There have been broad measures since September to address momentum, but stimulus is defensive, it is labelled ‘strategic’ concentrating on burgeoning local government debt and exports rather than domestic demand. Liquidity injections, and the incessant talking of more, do not show any sign of stimulating the populace to spend money, abandon conservatism toward consumption and repeal the anxiety shown around property. This can only be done with a much looser government stance on public spending and borrowing because on the horizon is a certain inhabitant of a famous house in Washington armed to the teeth with tariff threats.

Europe and China are both over regulated. China’s is borne out of fighting to keep hold of existing manufacturing and the development of self-sufficiency in practically everything. Europe’s sticklers for governance in Brussels is a vain attempt to protect consumers and citizens not only from cheap sub-standard imports, but from themselves in terms of how money is borrowed and spent. President Trump on the other hand is ripping up the rule book, or at least feigning to do so, resulting in Americans buying into everything fuelled by confidence and exceptionalism. Japan is ticking along nicely thank you very much, but it harbours doubts in its future path dogged by interest rate decisions and if it too will come into the crosshairs of the Trump tariff rifle. Therefore, with the other traditional bastions of economic centres in Europe and China convulsing under idiosyncratic influences of contraction, the prospect of demand, including that for oil cannot be anything other than problematic.

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