Optimism in Asian Markets as Investors Anticipate AI Impacts

In a week that began with positive momentum, Asian shares displayed an encouraging performance, defying the thin liquidity resulting from a holiday in U.S. markets. Hong Kong stocks particularly stood out, surging 1.4% on Monday, adding to last week’s impressive 7% gain. The enthusiasm is largely driven by optimism surrounding the potential for low-cost artificial intelligence (AI) adoption following the reveal of DeepSeek, a cutting-edge AI technology.

Goldman Sachs Bullish on Chinese Economic Outlook

Reinforcing this positive sentiment, Goldman Sachs has upgraded its forecast for Chinese economic growth and stock performance. The financial powerhouse suggests that widespread adoption of AI technology could lead to an annual earnings per share increase of 2.5% over the next decade. This shift is expected to raise the fair value of Chinese equities by between 15% and 20%, attracting approximately $200 billion in fund inflows.

In the spotlight is Alibaba (9988.HK), which has seen its stock price soar by 24% following announcements of a partnership with Apple (AAPL.O) aimed at bolstering AI services for iPhones in China. Alibaba is set to release its earnings report on Thursday, and market options indicate that investors are bracing for a potential swing of 7.5% in either direction based on the results.

European Markets Maintaining Momentum

Back in Europe, the pan-European STOXX 600 index continues to draw global investors, having risen for eight consecutive weeks and showing an 8% increase since the start of the year. On Monday, both EUROSTOXX 50 and DAX futures traded slightly higher, suggesting sustained investor confidence.

Mixed Signals from Japan

Japan’s Nikkei index, however, displayed a more muted response to recent developments. The yen’s appreciation was undercutting gains, despite a significant 2.8% rise in annualized economic growth recorded for the fourth quarter. Interestingly, markets appear to only be pricing in a minor chance of the Bank of Japan (BOJ) raising interest rates in March, likely due to the ongoing wage negotiations that will follow this month. Even a potential move in May is only considered a one-in-four possibility, which appears low given the recent positive economic data and the BOJ’s hawkish stance.

The yen strengthened to 151.55 against the U.S. dollar, reflecting broader trends in currency markets as the U.S. dollar came under pressure from disappointing retail sales figures for January. As a result, market expectations have shifted towards anticipating two interest rate cuts by the Federal Reserve this year, with a greater than 50% likelihood of action in June.

Upcoming Central Bank Decisions

Central banks in Australia and New Zealand are also at the forefront this week, with policy meetings expected to result in interest rate cuts. The Reserve Bank of Australia is projected to decrease rates by 25 basis points, while the Reserve Bank of New Zealand may opt for a more aggressive cut of 50 basis points.

Geopolitical Developments

Geopolitical tensions continue to loom large, particularly concerning the ongoing conflict in Ukraine. Talks aimed at resolving the Russia-Ukraine conflict are scheduled to commence in Saudi Arabia this week, though the specifics surrounding the participating parties remain vague. French President Emmanuel Macron is set to hold an emergency European summit in response to assertions from U.S. officials that Europe might not play a role in peace efforts, hinting that negotiations could primarily be led by the U.S. and Russia.

Key Market Influences

As we move into the week, several key events may influence market trends:

Eurozone finance ministers are meeting in Brussels to discuss fiscal matters.
Scheduled appearances by Fed Bank of Philadelphia President Patrick Harker and Fed Board Governor Michelle Bowman could provide further insight into future U.S. monetary policy.

As the week unfolds, investors will continue to monitor both economic indicators and geopolitical developments closely, positioning themselves in a dynamic and sometimes volatile market landscape.