The last week of January 2025 saw significant developments in both the tech sector and global trade, leading to volatility in financial markets. The week started off with markets broadly rising, buoyed by a reasonably positive U.S. earnings season. Nearly half of the S&P 500 companies reported, with strong results from tech, healthcare, and industrial companies driving double-digit year-over-year growth that exceeded expectations.

However, the Trump administration's announcement of severe tariffs aimed at Canada, Mexico, and China late on Friday sent shockwaves through the markets. The U.S. imposed 25% tariffs on Canada and Mexico and 10% on China, with the expectation that they would take effect almost immediately. The market reaction was swift, with the Australian market losing 2%, Japan also declining, and bond yields moving lower as investors weighed the potential inflationary and recessionary impacts of the tariffs. 

In the tech sector, the launch of the DeepSeek Chinese AI model earlier in the week caused some initial convulsions, but markets largely settled afterwards. However, the tariff news has now overshadowed strong earnings from major tech players like Apple and Meta. Interestingly, companies that have been more focused on the near-term ROI (return on investment) of their AI investments, such as Amazon and especially IBM, outperformed those that have been pre-emptively ramping up AI infrastructure investment. The hardware manufacturers and energy plays have been the hardest hit. The so-called Jevons Paradox, where increased efficiency leads to greater adoption and demand rather than reduced resource consumption, has been much cited by everyone in the space. However, the evidence so far is pointing to the fact that this might apply to the economy as a whole rather than to individually dominant players like Nvidia.

Beyond the headlines, there have already been indications of unexpected fiscal tightening in the U.S., compounded by reports last week that Elon Musk's "Department of Government Efficiency" has gained access to a US Treasury payment system, allowing them to directly control some government funding. This development, along with the tariffs, could potentially threaten household real incomes and global economic growth.

Despite the late-week turmoil, January closed out with generally positive returns. European markets were up over 8% in Australian dollar terms, gold rose 6%, and other markets were up 2-4%. Bond yields also moved lower. 

The key question going forward is whether the recent developments will prove disinflationary or recessionary. While the start of the year has been strong, the fast-moving and uncertain environment suggests volatility may persist in the weeks ahead.