A good month for European stocks, as Apple Blossoms

Financial markets have generally weathered January well. European stocks are leading the way, the currency adjusted return for the EuroStoxx 50 index is more than 8%, the FTSE 100 is higher by 5% and the S&P 500 is up by 3%. The Nasdaq is also managing to eke out a gain, and is higher by 1.9% this month, which suggests there is resilience in the tech space even if Nvidia’s share price is down 7% YTD, Apple’s share price is lower by 5% and Broadcom is lower by more than 6%. The Russel 2000 is higher by more than 3.4% so far in 2024, suggesting that small caps are challenging big tech as we move through the new year.

Will gold hit $3000?

Gold is extending gains on Friday after it hit a fresh record high on Thursday. The gold price is proving its haven credentials, as investors choose it to hedge fears about Trump’s tariff threats. Gold is outperforming US stocks and is higher by more than 6% YTD. The fact that stocks are rising at the same time as gold is a sign that risk sentiment is resilient to Trump’s tariff fears, even if they are playing in the background. Thus, we could see further gains for gold, with the elusive $3000 level now in sight.

Trump’s Tariffs turn from threat to reality

At the end of this week, the market is digesting news President Trump will impose 25% tariffs on Canada and Mexico from Saturday. The President also said that these tariffs could increase over time, although he is thinking about exempting oil imports, although that will depend on the oil price.

Canada and Mexico have threatened to respond with retaliatory tariffs, which raises the specter of a global trade war, which would have ramifications for the global economy. In the first 11 months of 2024, US trade with Canada totaled $699bn and $776bn with Mexico. The bulk of exports to the US were mostly linked to the auto sector and the energy sector. US car markets including GM and Ford saw their share prices turn negative on the back of the tariff announcements. The CAD and MXN have clawed back losses vs. the USD on the back of this announcement. This could be because it was well-signaled and a lot of bad news was already priced in, for example USD/MXN is at its highest level since 2020. Also, traders may be sitting on the sidelines to see what the impact of tariffs is from an economic standpoint and that could take some weeks to feed through to the real economic data.

Is the EU next?

The focus in the coming days will be who is next? Will Trump formalize a tariff for China, and will he also impose one on the EU? After a dismal set of GDP readings in the currency bloc, this is the last thing that the Eurozone economy needs right now. EUR/USD fell below $1.04 on Thursday evening. An announcement of tariffs on the EU could send this pair back to parity, so prepare for volatility.

Divergence for the Magnificent 7

It’s been a volatile week for the Magnificent 7. Firstly, DeepSeek knocked Nvidia, and its share price is down 15% in the past week.  Tech earnings season was also greeted with less enthusiasm than usual, and the movement in share prices was well below average for Meta, Tesla and others. Interestingly, Apple, which had been one of the weaker performers of the Magnificent 7 so far this year, outperformed its tech peers. As a whole, Bloomberg’s Magnificent 7 index is testing its 50-day moving average after a tough week for the big tech sector. A break below this level would be a bearish signal that further losses could be on the way.

However, there is some speculation about DeepSeek and whether it is as cost effective as it says it is. If there are holes in its design, then we could see Nvidia stage a comeback in the coming weeks.

Apple was the latest tech giant to report earnings on Thursday night. The meat of the earnings report was weak for last quarter, however, in the pre-market, Apple’s share price is higher by more than 3%, driven by forward guidance.

Apple’s upbeat forward guidance boosted the stock price

The CFO’s guidance for the current quarter boosted sentiment towards the stock. Revenue is expected to grow in the low to mid-single digits, even with headwinds, including a hit from currency volatility of - 2.5%, revenue growth will be in line with the December quarter. While this isn’t groundbreaking, it is better than expected, especially as Apple continues to navigate the Chinese slump in demand for its products.

However, during the earnings call, Tim Cook said that the markets that rolled out Apple Intelligence had stronger iPhone sales compared to those who did not. This is interesting for two reasons: 1, Apple Intelligence is not available in China and 2, Apple Intelligence was only rolled out in the last two weeks of the quarter to English speaking regions only. Thus, there could be the potential for Apple Intelligence to boost iPhone revenue down the line. Cook also said that the latest Apple iPhone 16 outperformed the 15 last quarter, and he sounded confident about the potential for future iPhone revenue due to a high level of upgraders, something that had been dwindling in recent years.

Is the worst over for iPhone sales?

The details of the report for Q4 were bleak, however, there is a sense that the worst could be behind Apple when it comes to iPhone revenue and that is why the stock price is advancing in pre-market trading. iPhone revenue was much weaker than expected for Q4 at $69.14bn, estimates were for $71.04bn, a decline of 0.8% YoY. Wearable tech also saw a 1.7% drop in revenue on an annualized basis. There were some pockets of strength including in iPad and Mac revenue, however, sales of the iPhone are the bellwether for Apple, and this was a weak link.

China, a source of uncertainty for Apple

The market was already prepped for weak iPhone sales in China during the holiday period, however, revenue growth in China fell by 11% YoY, which was more than analysts expected. China remains a source of uncertainty for Apple’s future revenue generation, however, the market is willing to look through this, as Apple’s suppliers also rose in the after-market on Thursday. There were gains for Skyworks and Qualcomm.  

This week has taught us that the Magnificent 7 are no longer moving in a unified block, and their share prices are moving on the back of their own idiosyncratic drivers including earnings and exposure to DeepSeek. This is a big shift and could be a major theme for the rest of 2025.