Market Analysis by Quasar Elizundia, Expert Research Strategist at Pepperstone
January 28, 2025 –
“Financial markets showed a tone of risk aversion this Monday, with a notable surge in the Japanese yen, a massive sell-off in tech stocks, and renewed concerns over U.S. trade policy, creating a complex landscape for investors.
Yen Strengthens on BoJ’s Aggressive Stance and Dollar Weakness
The Japanese yen index was the clear winner in the currency markets, posting an important gain of over 1% on the day, the largest daily increase among major currencies. The yen’s strength was driven by the recent hawkish shift by the Bank of Japan (BoJ), which raised interest rates last week and signaled possible further upward adjustments. The USD/JPY pair fell by about one percent, reflecting the yen’s strength against a relatively weakened U.S. dollar. The dollar index posted a slight 0.01% decline on the day, possibly influenced by cautious trading ahead of the upcoming Federal Reserve meeting.
The Swiss franc also strengthened, rising 0.55% on the day, demonstrating a preference for safe-haven assets. In contrast, commodity-linked currencies such as the Australian dollar (AUD) and the New Zealand dollar (NZD) fell 0.63% and 0.57%, respectively. The Canadian dollar (CAD) also weakened by 0.34%, possibly affected by renewed trade tensions with the U.S.
Tech Stocks Plunge as AI Race Intensifies
A massive sell-off in the tech sector, especially among U.S. companies, pushed major indices lower. The NASDAQ 100 tumbled over 3%, while the S&P 500 slipped 1.6%. This decline was largely attributed to growing concerns over continued U.S. leadership in the artificial intelligence (AI) space.
The emergence of DeepSeek, a Chinese AI startup, has challenged established U.S. players. DeepSeek’s AI model, which reportedly achieves performance comparable to its U.S. counterparts while consuming less energy and requiring less advanced hardware, triggered a recalibration of speculative bets in the sector. This resulted in significant losses for U.S. tech giants, with Nvidia dropping 15% and Broadcom, Oracle, and Arista experiencing declines ranging from 12% to 18%.
European stocks were also affected, with the EURO STOXX 50 falling 0.31% and Germany’s DAX 40 losing 0.33%. ASML, a key supplier to the semiconductor industry, slid 7%.
Volatility Rises and Nikkei 225 Suffers
Volatility intensified across several markets. The Nikkei 225 was hit significantly, with a +200% increase in its volatility compared to its 14-period ATR. Similarly, the NAS100 saw a 201% volatility increase.
Pressure on LATAM Currencies
Latin American currencies faced renewed pressure, with the Mexican peso (USDMXN) logging a 2.2% drop. This weakness was exacerbated by the resurgence of trade tensions with the U.S. The recent threat by the U.S. administration to impose tariffs on Mexican products, in response to border control issues, has raised concerns about potential disruptions to trade and currency flows. These tariffs could particularly impact Mexico’s automotive sector, a crucial component of its export-driven economy. The threat also affected volatility of the USDMXN pair, which jumped by 176%.
The Colombian peso and the Chilean peso also depreciated against the U.S. dollar, falling 0.67% and 0.49%, respectively.
Commodities Pull Back
Commodities markets broadly retreated, with gold falling from a two-month high to trade below $2,735 per ounce. The precious metal posted a 1.36% daily decline. Silver also dropped 1.86% on the day. Energy commodities were weak as well, with WTI crude futures down 2.39% and Brent slipping 1.92%.
Outlook: Fed Meeting and Economic Data in Focus
Short-term market direction will likely hinge on the upcoming Federal Reserve meeting this Wednesday. While the central bank is widely expected to keep interest rates unchanged, investors will closely analyze Chair Powell’s remarks for clues about future monetary policy.
Key economic data, including U.S. GDP growth figures and PCE inflation data, will also be closely watched. In addition, investors are monitoring political developments in the U.S., particularly those related to trade policy.
In Summary
Monday’s market action was characterized by a flight to safe havens, evidenced by the yen’s surge and declines in riskier assets like tech stocks and emerging market currencies. Renewed trade tensions and worries over U.S. leadership in AI added layers of complexity to the investment landscape. The upcoming Federal Reserve meeting and key economic data will be crucial in determining the market’s next move..”
Analysis by Quasar Elizundia, Expert Research Strategist – Pepperstone