S&P 500 Dips as AI Competition and Trade Tensions Weigh on Sentiment | Daily Market Analysis

Key events:

• USA - Durable Goods Orders (MoM) (Dec)
• USA - CB Consumer Confidence (Jan)

A wave of uncertainty swept through the financial markets on Monday as the S&P 500 slid 1.5%, with tech stocks bearing the brunt of the selloff. The Dow Jones Industrial Average bucked the trend, gaining 289 points (0.7%), while the tech-heavy NASDAQ Composite tumbled 3.1%. The CBOE Volatility Index surged over 20%, reflecting heightened market anxiety spurred by fears that Chinese AI startup DeepSeek could disrupt US dominance in the AI sector.

Corporate earnings are taking center stage this week, with major tech players such as Meta Platforms, Apple, Microsoft, and Tesla scheduled to release their quarterly results. As of now, 16% of S&P 500 companies have reported earnings, with 80% exceeding expectations on earnings per share and 62% delivering positive revenue surprises, according to FactSet. These figures hint at resilience in certain sectors despite macroeconomic headwinds.

Elsewhere, AT&T saw a 6% boost in its stock price following stronger-than-expected fourth-quarter subscriber growth, driven by demand for its premium 5G plans that integrate high-speed fiber services. This development adds a positive note in an otherwise turbulent session for equity markets.

Meanwhile, the Australian Dollar continues its downward trajectory against the US Dollar for a second consecutive day, as tariff threats from President Donald Trump stoked risk aversion. Reports indicate that Trump's advisers are moving toward imposing 25% tariffs on Mexico and Canada by early February, adding to global trade tensions. The risk-sensitive AUD was further pressured by weak Chinese industrial profits, which fell 3.3% year-over-year in 2024, marking the third straight year of contraction. Efforts by Chinese authorities to stimulate their stock market, including the approval of new long-term investment programs worth 52 billion yuan, failed to lift sentiment.

Additionally, the British Pound lost momentum after a three-day winning streak against the US Dollar, trading around 1.2440. Speculation about a potential rate cut by the Bank of England to 4.5% at its upcoming meeting has weighed on the GBP, exacerbated by lackluster economic data. Sluggish GDP growth, weaker inflation, and soft retail sales and labor market figures have bolstered the case for a 25-basis-point reduction, adding to bearish sentiment.

The USD/CHF pair recovered from recent losses, trading near 0.9050 during Tuesday's Asian session. This recovery came amid a stronger US Dollar, supported by Trump's announcement of sweeping tariffs on imports, including computer chips, steel, and pharmaceuticals. These measures aim to bolster domestic manufacturing and align with Trump’s broader trade strategy. Treasury Secretary Scott Bessent also proposed universal tariffs starting at 2.5%, with the potential to escalate to 20%, underscoring the administration’s aggressive stance on trade. While these proposals remain in flux, the uncertainty has added a layer of complexity to market dynamics.

The Swiss Franc, meanwhile, faced downward pressure as the Swiss National Bank maintained an ultra-dovish policy stance. SNB Chairman Martin Schlegel reiterated the possibility of negative interest rates, citing concerns about deflationary pressures as inflation in Switzerland fell to 0.6% in December. This dovish outlook limited the Franc’s appeal as a safe-haven currency.

The Japanese Yen also faced selling pressure during Tuesday's Asian session, retreating from a recent multi-week high. Market participants worried that Trump’s tariff policies could stoke inflation, pushing US Treasury yields higher and undermining the lower-yielding Yen. However, expectations of further interest rate hikes from the Bank of Japan have kept the Yen from a significant depreciation. At the same time, speculation that the Federal Reserve may lower borrowing costs twice by year-end serves as a headwind for US bond yields and the Dollar, creating a nuanced trading environment for the USD/JPY pair.

Looking ahead, market participants are bracing for a pivotal two-day Federal Open Market Committee meeting, set to kick off today. Traders will closely monitor policy signals and US macroeconomic data for further clues on market direction. With heightened volatility across asset classes, this week promises to be a critical one for investors navigating the interplay of earnings reports, geopolitical developments, and central bank policy.