Dear valued client,
Markets lost slight ground this week as the Bank of Canada cut its interest rate by 25 basis points to 3% amidst escalating trade tensions with U.S. President Donald Trump’s threat of imposing a 25% tariff. Governor Tiff Macklem stated that monetary policy has limited power to counteract the economic fallout from such trade conflicts, emphasizing that tariffs would make Canada’s economy less efficient, reduce production, and lower earnings. He noted that while monetary policy can offer some stability with inflation near the two-percent target, it struggles to address both weaker economic output and rising inflation simultaneously.
South of the border, the Federal Reserve has decided to maintain the current interest rate (4.25% to 4.5%). This decision comes despite pressure from President Trump to reduce rates. Powell explained that the Fed would only consider adjusting rates if there were “real progress on inflation” or noticeable “weakness in the labor market.” He emphasized a cautious approach, noting that the central bank is not in a hurry to alter its policy since rates have been lowered in previous meetings. Inflation remains above the Fed’s 2% target, justifying the pause.
President Trump has suggested that Egypt and Jordan should take in Palestinian refugees from Gaza; a proposal that was met with strong resistance from both countries and the Palestinians. Concurrently, following a resolution to a dispute over the weekend, Israeli Prime Minister Benjamin Netanyahu announced the release of six Israeli hostages. This agreement allowed for the return of hundreds of thousands of Palestinians to northern Gaza starting this week, marking the first time since the onset of the conflict with Hamas that such movement has been permitted under the current ceasefire deal.
The M23 rebel group, composed of ethnic Tutsis and supported by Rwanda, has claimed control over the city of Goma in the eastern Democratic Republic of Congo. This city, with a population of 2 million, serves as a crucial hub for the trade and transport of minerals like gold, tin, and coltan, which are essential for manufacturing electronics such as cell phones and electric vehicle batteries. The Congolese government has labeled this move by the rebels as “a declaration of war,” highlighting the ongoing conflicts in this mineral-rich area, which have roots stretching back to the 1994 Rwandan genocide.
The launch of DeepSeek’s low-cost R1 “reasoning” model has significantly impacted the U.S. stock market, particularly tech stocks, leading to a nearly $1 trillion loss in the Nasdaq 100’s value on Wednesday. This Chinese AI startup’s model, which rivals offerings from major U.S. companies like OpenAI, Alphabet, and Meta, was developed for just $6 million, a fraction of the cost for similar U.S. models. Despite U.S. restrictions on exporting advanced semiconductors, DeepSeek managed to achieve competitive performance using less advanced Nvidia chips, causing a 17% drop in Nvidia’s stock and minor declines in Alphabet and Microsoft shares. While some like Goldman Sachs see this as a sign of potential for smaller AI companies, there is skepticism regarding the sustainability and scalability of DeepSeek’s approach, with analysts from Bernstein suggesting that the market reaction might be an overblown “Twitterverse panic.” Future U.S. policy under the Trump administration might further restrict AI chip exports to China, aiming to maintain America’s technological lead.
“Disruptors don’t have to discover something new; they just have to discover a practical use for new discoveries.” – Jay SamitHave a great weekend,
PW
