One month in and the ASX good times roll on while the US collects its thoughts

Australia’s sharemarket has broken records this week all while its US counterpart takes a deep breath to recover from the shock of China’s AI capability.

US stocks were spooked this week by the realisation China’s AI capability could challenge Silicon Valley dominance. Picture: Getty Images

Australian stocks hit records this week as US stocks mostly recovered from a scare about China’s AI capability, and falling inflation at home boosted expectations that interest rate cuts will start in February.

It was a volatile week for markets as DeepSeek’s AI success came on top of uncertainty about US trade policy, central bank meetings, tech-sector earnings reports, US economic data and the December quarter inflation report in Australia.

The latter was the key driver of Australian stocks.

But while Nvidia fell 17 per cent to a near four-month low of $US117 – its biggest one-day fall since March 2020 – and the US sharemarket briefly dived as volatility spiked, investors quickly regained their composure when experts downplayed the competitive threat posed by DeepSeek.

Australia’s underlying inflation rate, meanwhile, fell to 3.2 per cent against a 3.4 per cent forecast by the Reserve Bank.

Like Nvidia in the US, Australian data centre owners such as Goodman Group and NEXTDC were some way below their record highs as a result of lingering concern about the potential ramifications of DeepSeek’s low-cost model on the global AI ecosystem.

However, overall sentiment continued to be bullish. Stock markets in the UK, Germany and Australia hit record highs and the US market had broadbased gains. US economic growth was above trend and further interest rate cuts were expected in most advanced economies.

Australia’s ASX 200 index rose 1.5 per cent for the week and was up 4.6 per cent for the month.

It was the best week so far this year and the best month since a 7.1 per cent rise in December 2023.

It was also the strongest January for Australian shares in the past two years.

The positive mood in stocks was in contrast to FX market volatility amid US trade policy uncertainty.

US President Donald Trump had vowed to go ahead with his planned 25 per cent tariffs on imports from Mexico and Canada this weekend – citing a list of grievances, from the unchecked flow of fentanyl and people, to substantial trade deficits.

Mr Trump continued make threats of impending tariffs against China. He also threatened tariffs of 100 per cent on BRICS (Brazil, Russia, India, China, South Africa, Egypt, Ethiopia, Indonesia, Iran and the United Arab Emirates), if they tried to “replace the US dollar in international trade”.

He was due to sign executive orders at 3pm on Friday (7am AEDT Saturday).

The US dollar rose as much as 1.5 per cent against the Mexican peso and 1.3 per cent against the Canadian dollar, hitting a five-year high. Volatility spilt over to the Australian dollar and gold.

The Aussie dollar hit a two-week low of US61.99c and is down about 10 per cent since September.

Spot gold rose as much as 1.5 per cent to a new high of $US12799.65 per ounce.

However, Mr Trump was unclear whether oil imports would be included in tariffs on Canada.

Earlier this week he had warned of tariffs being imposed on foreign-made semiconductor chips, pharmaceuticals and steel in order to compel producers to manufacture in the

US.

“We’re going to look at pharmaceuticals – drugs – we’re going to look at chips, semiconductors, and we’re going to look at steel and some other industries,” he said.

He also threatened to impose tariffs on copper and aluminium produced overseas.

“If you want to stop paying the taxes or tariffs, you will have to build your plant right here in America,” he said.

Asked about a report that US Treasury Secretary Scott Bessent wanted universal tariffs on imports starting at 2.5 per cent and rising by that amount each month, Mr Trump said he wanted “much bigger” tariffs. Last weekend he threatened to impose a 25 per cent tariff on Colombia after it refused to accept a plane-load of deportees but the South American backtracked.

Although US Federal Reserve chair Jerome Powell refused to comment this week, the role of inflation expectations underscores the nuanced impact that tariff increases might have on the Fed’s rate-setting decisions, according to SPI Asset Management managing partner Stephen Innes.

“The landscape grows increasingly complex if tariffs are applied in a staggered fashion, hitting various countries and products at different times,” Mr Innes said.

“This nuanced rollout muddles the Federal Reserve’s task of pinpointing whether escalating prices stem directly from these tariffs or are influenced by broader economic currents.

“The last thing the Federal Reserve needs is a monthly tariff-induced price spike wreaking havoc on their inflation forecasts and destabilising financial markets.”

The strong rise in Australian shares came amid heightened speculation that the December quarter inflation data was low enough for the RBA to start cutting interest rates.

A majority of economists polled by Bloomberg on Friday expected the RBA to cut rates after its February 17-18 meeting, in what would be its first policy easing in more than four years.

Twenty of 23 respondents expected the Reserve Bank to lower its cash rate to 4.10 per cent after the meeting. Three economists, including Barrenjoey and HSBC, were still in the no-change camp.

Financial market pricing implied about a 90 per cent chance of a reduction.

The poll was carried out after official CPI data on Wednesday showed core inflation eased by more than expected in the December quarter.

That resulted in economists from Westpac, UBS, Morgan Stanley, Royal Bank of Canada, AMP and TD Securities bringing forward their calls for the first RBA cut to February.

Originally published as One month in and the ASX good times roll on while the US collects its thoughts