Are Tariffs As The New Norm Going To Create More Trading Blocs?

INSIGHT WEEKLY: February 9, 2025

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🌐 Markets Overview

Markets:

European markets have performed well this year due to stocks being underpriced compared to US and Asian markets. Also, the central banks have cut interest rates, and more cuts are expected.

Then, there is the topic of tariffs. Investors feel that stocks in Europe may be a better option than those in the US due to the impact of tariffs and retaliations.

What about the expectations of AI and tech earnings? DeepSeek has cast a shadow on the AI phenomenon. As mentioned in previous newsletters, questions are being asked about DeepSeek's apparent ability to be more capital-efficient in developing AI models. Investors are taking a more cautious approach.

If the stock price outlook for AI/tech is neutral, then what will be the impact of tariffs in assessing the overall market direction?

Will tariffs and retaliation harm world trade? Conventional economic wisdom is that it will.

If countries affected by US tariffs form trading blocs, they could trade with each other tariff-free but have tariffs against non-members. How many of these trading blocs will emerge? Some blocs already exist, and these partnerships could deepen. Examples are the European Union, Trans Pacific Partnership (CPTPP), and Mercosur in Latin America.

Are tariffs mutually destructive? This is the outlook for the 10% tariffs applied to China by the US, with and without retaliation by China.

The tariffs are being imposed not only to protect US companies and for raising tariff revenues but also for other geopolitical reasons, such as border security. The US considers China to be a major producer of fentanyl. For these reasons, the new administration may consider that the economic impact may be a price worth paying.

Magnificent 7:

Meta (the owner of Facebook, Instagram, and WhatsApp) has been the best performer of the Magnificent 7 this year with a 22% gain. Good earnings and investment in AI that is being viewed favorably by investors.

Tesla sales fall dramatically in Europe as consumers react to Elon Musk’s political activism, especially in Europe. Tesla sales in Germany fell 59% in January compared to January 2024. EV sales in Germany and France declined in 2024 due to the removal of government subsidies, but there was a recovery, which is now seeing a setback.

Nvidia has fallen out of favor due to the DeepSeek effect.

 Major Semiconductor stocks:

ARM’s stock has risen approximately 13% year-to-date, reflecting investor enthusiasm about its involvement in AI and data infrastructure projects. Notably, its participation in Stargate, a multi-company AI initiative, has fueled optimism about future growth.

AMD has struggled in early 2025, with its stock declining 11% year to date due to concerns over its data center revenues.

🇺🇸 US economy

Manufacturing Purchasing Managers’ Index (PMI) showed the first expansion in manufacturing activity since 2022. However, tariffs are seen as a potential threat to the manufacturing recovery.

Labor market slows as nonfarm payrolls report showed the addition of 143,000 jobs in January, a decline from December’s revised 307,000 and below market expectations. Interestingly, the unemployment rate edged down to 4.0% from 4.1%. Additional data indicated a decline in job openings to a three-month low, suggesting a gradual cooling in the labor market.

Fiscal spending review by the newly formed Department of Government Efficiency (DOGE) has been reviewing federal spending in order to identify waste. This is headed by Elon Musk, and DOGE has been reported to be using AI tools to review government spending.

Elon Musk has posted this summary asking for feedback.

The next Federal Reserve meeting on interest rates is scheduled for March 18,19.

S&P500 is +2.0% in the year to date.

🇬🇧 UK economy

Tariffs from the US are an unknown factor for policymakers. The Bank of England has stated that it will be “careful” with interest rate cuts amidst the uncertainty of the effects of the tariffs.

Inflation is expected to increase, possibly up to 4%, by the end of the year.

Interest rates were cut by 0.25% to 4.5% at the last Bank of England meeting, with two of its nine members voting for a 0.5% cut. The expectation is that there will be further cuts in the year, with interest rates possibly down to 4% by the end of the year.

The next Bank of England meeting on interest rates is scheduled for March 20.

FTSE100 is +5.5% in the year to date.

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🇯🇵 Japan economy

Nikkei 225 dips below its 1989 high with a 1.9% fall in the week, with concerns about the impact of US tariffs, as well as future interest rate increases.

Tariffs from the US remain a concern. At the meeting between Prime Minister Ishiba and President Trump, the assurance was that Japan is a major US ally in the region. Japan has been a big investor in the US, and the Prime Minister announced that the investment will grow to $1 trillion, including car-making as well as a $44 billion liquefied natural gas (LNG) pipeline project in Alaska and an increase in LNG imports. Upcoming:

The next Bank of Japan meeting on interest rates is scheduled for March 18, 19

See previous spotlight on Japan.

🌐 Artificial Intelligence and Tech

This cover has been designed using assets from Freepik.com

DeepSeek shook up the AI world over the last two weeks, reporting that its training cost was no more than $6 million.

Now it is facing growing scrutiny over its data practices, leading to calls for bans and allegations from competitors. In the United States, a bipartisan group of lawmakers has introduced the “No DeepSeek on Government Devices Act,” which seeks to prohibit federal employees from using DeepSeek’s AI app on government-issued devices. Legislators argue that the app could be exploited by the Chinese government for surveillance or disinformation, raising concerns about national security risks. Texas has already acted on these concerns, implementing a ban on DeepSeek, along with other Chinese-backed applications, from state government devices. Australia is also moving toward restricting DeepSeek’s presence in government networks, citing potential data security vulnerabilities.

OpenAI has voiced concerns about DeepSeek’s methods, alleging that the company may have utilized a technique known as “distillation” to develop its AI model at a fraction of the cost typically required. This process involves extracting knowledge from a larger AI system (ChatGPT?) by systematically querying it and using its outputs to train a competing model. While not classified as direct hacking, this practice violates OpenAI’s terms of service and allows companies to replicate advanced AI capabilities without the same level of investment. DeepSeek’s rapid progress has raised broader questions about fair competition in AI development and the ethical boundaries of training data usage. As the debate over AI governance intensifies, the growing push for restrictions highlights the geopolitical tensions surrounding technological advancements.

AI integration is underway in major technology companies as they introduce AI into their operations, leading to workforce reductions as automation takes over certain roles. Several firms have announced significant job cuts, citing efficiency improvements driven by AI advancements. Salesforce has frozen new engineering hires and plans to eliminate approximately 1,000 positions, aligning with its strategy to streamline costs and enhance AI-driven services. Google has encouraged thousands of employees to take voluntary exits as it restructures teams, shifting focus toward automation and machine learning.

Meta’s leadership has also acknowledged that AI is reshaping the workforce. CEO Mark Zuckerberg has suggested that AI-powered engineering tools could soon match the capabilities of mid-level software developers, reducing the need for human programmers in some areas. As AI-driven automation continues to evolve, companies are prioritizing roles that contribute to AI development while scaling back on positions that can be replaced or optimized by these technologies.

Get your free guide to AI

See the previous spotlight on AI chips 

🌐 Crypto Corner

Top 10 cryptos:

XRP was up 48% year to date last week, but now only 14%. Reasons for the drop are global trade tensions and the wider crypto market sell-off.

Also, the XRP ledger experienced a major disruption on February 5, halting block production for about an hour.

See the previous spotlight on Bitcoin halving

🏅5️⃣ Billionaire Leaderboard

Mostly driven by stock market performance :

1. Elon Musk (Tesla, SpaceX) $397bn ⬇️ $24bn Tesla declines 10%

2. Mark Zuckerberg  (Facebook/Meta) $246bn ⬆️ $9bn up one place as Meta gains 4%

3. Jeff Bezos (Amazon) $242bn ⬇️ $8bn down one place as Amazon declines 4%

4. Larry Ellison (Oracle) $216bn

5. Bernard Arnault and family (LVMH) $182bn

SPOTLIGHTS

Links to earlier spotlights :

Residential property ;

Japan ;

India - an emerging economic power ;

Recession ;

AI chips ;

Bitcoin halving ;

US National Debt ;

Gold ;

Nvidia ;

The $84 trillion wealth transfer ;

Crowdstrike issue