Can Nvidia Trump the US president and boost market sentiment?

Stocks are calm this morning as we wait for some key events. At the end of the week, we get the latest core PCE reading at a delicate time for the US economy, with economic data surprising on the downside and consumer confidence slumping. Later this morning we get BP’s strategic review, it’s sink or swim time for the UK oil major, if the CEO does not deliver later today then the whole future of the company is in doubt. Last, but by no means least, Nvidia’s results are released tonight, and this could determine where US tech stocks go next after a tough start to 2025 for the Magnificent 7.

US tax cuts boost sentiment

Risk sentiment is higher today, and European stocks are following the Hang Seng higher. US indices faltered on Tuesday; however, futures are pointing to a positive open after the US blueprint was passed by House republicans which will contain a raft of tax cuts. This won’t do much to help the US budget deficit, but it may help US stocks to narrow the gap with European and Chinese stocks that has developed since the start of the year.

Russia and Ukraine deal is pivotal for market sentiment in Europe as oil drops sharply

There is a divergence in stock market performance this year. So far this week, European and Chinese shares are outperforming their US counterparts. News that Ukraine has agreed to a deal that will give the US access to Ukrainian minerals is also boosting sentiment across Europe. Although this is not a peace deal between Russia and Ukraine, the fact that President Zelensky is going to Washington on Friday is being noted by financial markets. This is seen as a step towards the peace process, and it could also be a step towards Russian oil returning for sale on the global commodity markets. WTI oil dropped below $70 per barrel on Tuesday and Brent crude is also trading just above $73 per barrel. The downward pressure on the oil price, which has seen WTI and Brent fall 4.3% and 3.75% in the past 5 days, is a sign that the market thinks the war in Ukraine will be over soon. If that changes, then we could see the oil price stage a recovery.  

Defense spending the main theme driving European stocks

What is bad for the oil price, is good news for European equities. The UK’s boost to its defense spending announced on Tuesday, along with hopes that Europe will soon follow suit has boosted the defense sector in Europe. The Eurostoxx aerospace and defense sector has outperformed the overall European index so far this year, which highlights how much of a premium events in Ukraine and Russia are having on the European equity space.

We expect this to continue, but we would add European defense names are close to a record high. Could we be in a buy the rumour and sell the fact scenario? Defense stocks are propelling the Eurostoxx index, but can it be sustained and act as a long-term driver for the European stock market? BAE Systems, the UK defense firm, is lower on Wednesday, after  a stunning rally in recent weeks. It is natural that defense stocks take a breather at some stage, but we think that this could be a short-term pullback, rather than an end to the defense theme in Europe.

There are undoubtedly challenges ahead for European stocks to maintain their lead in the global equity space. Europe is also known for its luxury stocks, and these have underperformed so far this month, as you can see in the chart below. LVMH has underperformed BAE Systems, as government spending boosts defense names, and as a potential slowdown in the US economy threatens the outlook for the luxury sector.  .

Chart 1: BAE systems, LVMH and the Eurostoxx 50 index, normalized to show how they move together over the past 12 months.

Source: Bloomberg and XTB

The Hong Kong index rose by more than 3% on Wednesday, driven by tech stocks, after some positive news about China’s AI potential. DeekSeek has made its model public once more to boost uptake after a raft of Chinese AI models came on the market, cementing China’s position as an AI powerhouse. Alibaba is launching its latest model and is also planning to invest ‘US style’ amounts of money into capex in the coming years. Alibaba said that it would invest $53bn over three years to boost its cloud infrastructure and its AI capabilities.

BP’s share price is rising by 1% ahead of today’s strategy update. We will provide comment on that later today. Also, the market will be waiting to hear from  Nvidia later today. Its results could determine whether the US tech sector can reverse its fortunes and start to boost the US stock market as we move through Q1. For now, Europe is in the ascendency, but a lot rests on the resolution of the conflict in Ukraine.