Tech drag and geopolitics drive market volatility

Investors are feeling skittish. Following last week’s plunge in gold and silver prices, this week it was the turn of the technology sector. Microsoft had already hinted at trouble, with a significant fall in its share price as investors digested its elevated spending on artificial intelligence (AI). This week, it was chip giant AMD that sent markets roiling, as inflated expectations finally caught up with reality. 

On first view, there was little that should have disappointed markets in AMD’s results. The company beat analysts’ expectations on full-year earnings and forward guidance. However, its lofty valuation left little margin for error and investors found issue with the company’s over-reliance on one-off sales to China. Rival chipmakers, such as Qualcomm, Nvidia and Broadcom, were also caught up in the sell-off 

The other notable area of weakness was in software. The “Software-mageddon" has snowballed in recent days, with significant selloffs for companies such as ServiceNow and Oracle. The launch of Anthropic’s Claude Cowork tool has magnified concerns that AI could take out software providers completely. In particular, its plug-in legal tool has hit public publishing and legal software companies hard, including RELX (owner of LexisNexis), Sage and London Stock Exchange. 

Apart from those companies caught up in the software rout, UK markets managed to sidestep much of the turmoil. The FTSE 100 hit new highs mid-week, peaking at over 10,400 though weakness from Vodafone and oil behemoth Shell pushed the index lower in the latter part of the week. 

The FTSE 100 was +0.9% over the week by mid-session on Friday, with the more UK-focused FTSE 250 trading -0.7%.

Geopolitics

This week, Donald Trump turned his attention to Iran, threatening to launch strikes if the country didn’t agree to a deal governing its nuclear program. In a social media post on Wednesday, President Trump said a "massive armada" was on its way to Iran, urging its government to "come to the table". The Iranian foreign minister said the country would respond “immediately and powerfully” to any aggression. 

The two countries met in Oman on Friday to hold talks. Ahead of the talks, Trump said: “I’ve written the Iranian leaders a letter saying, ‘I hope you’re going to negotiate because if we have to go in militarily, it’s going to be a terrible thing’”. Regional allies such as Saudi Arabia and the UAE have said that they will not allow their airspace to be used for strikes on Iran. 

The altercation is having an impact on the oil price. It rose 3% on Wednesday as the two sides traded blows, with Brent futures hitting almost $70 a barrel. There are fears that Iran could weaken global oil supply by disrupting the Strait of Hormuz. Around 20% of global oil supplies pass through the zone. 

Later in the week, Donald Trump had a call with China’s leader Xi Jinping. President Xi said Taiwan was "the most important issue" in China-US relations and told the US president to be “prudent” when supplying weapons to the island. In December, the US announced an $11bn arms sale to Taiwan. However, Xi added that he considered his relationship with the US to be of “great importance”.  Trump described the call as "excellent" and "long and thorough".

US Vice President JD Vance also unveiled plans to marshal allies into a preferential trade bloc for critical minerals. Members could collaborate on pricing, with coordinated price floors. The move is part of efforts to break China’s stranglehold on strategic materials, crucial to areas such as AI. 

It was another noisy week in UK politics. While the action started in the US, there was some domestic turmoil as Prime Minister Starmer came under pressure about what he did or didn’t know about Peter Mandelson’s relationship with Jeffrey Epstein. Markets reacted badly to his possible defenestration, with the currency and government bond markets coming under pressure. UK borrowing costs rose to their highest since November, with the 10-year yield up 0.05 percentage points at 4.6%, while the pound was down 0.5% against the dollar and 0.4% against the euro. There had been a period of relative calm in the gilt market following the budget, but this political turmoil threatens to destabilise the UK bond market once again. 

Economics 

While all the attention was on the political turmoil surrounding the Peter Mandelson scandal, there was a quiet piece of good news for Rachel Reeves in the UK’s PMI data. The S&P Global UK Manufacturing PMI – a forward-looking indicator of business conditions – showed optimism in the manufacturing sector at a 17-month high as output, new orders and new export business all increased. Data for the services sector also showed a robust increase in business activity in January. S&P Global said there had been a rebound in business sentiment following the budget.  

There were even better signs from the country’s beleaguered construction sector. The S&P Global UK Construction Purchasing Managers’ Index for January showed total industry activity sharply up from December's five-and-a-half year low. The index jumped from 40.1 to 46.4 in a single month. It was a clear sign that the UK construction sector has exited its tailspin, and firms are now hopeful that new projects will emerge in the year ahead. 

However, this stronger data, combined with still-high inflation levels, meant the Bank of England left interest rates on hold. It was a close call, with only five members of the Monetary Policy Committee voting for a hold and four voting for a cut. It makes monetary easing at the next meeting all the more likely. 

The MPC is forecasting a sharp reduction in inflation from April onwards. CPI inflation has been coming down marginally faster than the Bank of England’s predictions and it believes the measures announced in the Autumn Budget will also have a deflationary effect. It forecasts headline inflation at 2.1% in April, only marginally higher than the central bank’s target. Pay rises are cooling, which is also exerting a downward pull on inflation. 

Internationally, US PMI data was stronger over the month, though there were signs of the impact of tariffs on business activity. January’s S&P Global PMI showed stronger growth, although subdued consumer confidence and ongoing uncertainty limited gains. Service providers reported the steepest reduction in foreign demand in just over three years, with some firms citing the impact of tariffs and political uncertainty. The headline S&P Global US Services PMI Business Activity Index recorded 52.7 in January, up from 52.5 in December.

The US manufacturing PMI survey also showed strength, with the index rising from 51.8 in December to 52.4 in January. However, growth was partly driven by companies building inventories, rather than by new orders. Tariffs remained a notable theme, driving up input costs and holding back demand, particularly from international markets. 

The EU’s inflation rate fell to 1.7% in January, lower than the 2% target. Lower energy costs and a stronger euro dampened price rises. Core inflation, which strips out volatile food and energy prices, fell 0.1 percentage points to 2.2%. It also meant that, as expected, the ECB kept rates on hold. 

Companies 

Shell – The oil giant posted weaker-than-expected quarterly profits of $3.3bn. However, its share price was supported by the announcement of a $3.5bn share buyback and a 4% lift in its dividend. Earnings were hit by a relatively weak oil price; analysts had been expecting profits of $3.5bn for the quarter. The company has been undergoing some rationalisation, with a more conservative capital spending programme. Chief executive Wael Sawan says he will drive cost cuts to the “upper limit” of the company’s range. This would take them to around $7bn, having already cut $5bn from budgets across the group. 

GSK – The pharmaceutical giant had a strong quarter with overall revenues rising by 7% to £32.7 billion. This was slightly ahead of market expectations. The company also showed real strength in certain divisions. For example, its speciality medicines division, which covers treatments for HIV and certain infectious diseases, grew by 17%. It saw 43% growth in its oncology division, while the Respiratory, Immunology & Inflammation (RI&I) division delivered 18% growth.

The company has faced headwinds over the past 12 months. Over 50% of its sales are in the US and it has been vulnerable to uncertainty over the pricing rules from the White House. Previously, President Trump was threatening a 100% tariff on imported medicines, though GSK’s significant investment in the US would have been a mitigating factor. In December the group entered a deal with the US government to broaden access and lower prices. 

BT – The group saw customer losses slow in the last three months of 2025. It lost “only” 210,000 customers on its Openreach broadband network, fewer than the 239,000 predicted. Openreach still services around 21m homes, but has been losing market share to a number of new entrants such as CityFibre and Netomnia. Chief Allison Kirkby said the group’s position in the broadband market was starting to stabilise

Vodafone – Vodafone’s share price weakened following a market update, despite full-year profit and cash flow forecasts at the top end of analyst expectations. Investors were concerned about weakness in the group’s important German business, where quarterly service revenues fell 0.7%. Operations in Germany have been struggling, and investors had been encouraged by a return to revenue growth in the first half of 2025. In the UK, organic sales revenue declined 0.5% after a 1.2% increase in the second quarter, but the company said the integration of VodafoneThree was “progressing well and firmly on track“. Looking at the wider picture, Vodafone saw total revenue increase 6.5% from the same quarter a year ago, to €10.5bn. The company is continuing its share buyback programme, returning €3.5bn to shareholders by that route so far this financial year.

Alphabet – All eyes were on the US technology sector this week and Alphabet was first to report. Google’s parent company, Alphabet, said it plans to nearly double its capital spending next year to between $175 billion and $185, which is significantly ahead of analyst expectations of $120bn. Capital spending was already rising in the fourth quarter, hitting almost $28bn over the three months to December, bringing the yearly total to $91.4bn. The market greeted the announcement more warmly than it has for many other technology giants. The company has been building momentum in the AI race in recent months following the launch of its new Gemini models. It has gained some ground on rivals such as OpenAI. Markets were reassured by chief executive Sundar Pichai, who said capital spending would be supported by earnings and cash flow, rather than more borrowing. 

AMD – Chip group Advanced Micro Devices saw its shares slide in the immediate aftermath of its results announcement, with investors fretting about its future prospects. Although the group beat expectations for current year earnings, there were concerns that it was too dependent on one-off sales from its China business and lacked the bandwidth to take on the mighty Nvidia. AMD said its revenue in the first quarter would be $9.8bn, slightly ahead of analysts' average estimate of $9.67 billion. However, it showed slowing momentum and was somewhat lower than the $10.27 billion the company reported in the fourth quarter.

Amazon – Amazon shares fell in the wake of its fourth quarter results statement. Revenue was behind analysts’ forecasts, at $211.33 billion vs $213.39 billion expected. . The company also said capital expenditure would hit approximately $200 billion in 2026, far above analysts’ expectations of $146.6 billion . The spending is tied to data centres and other infrastructure to meet burgeoning AI demand. The company opened its $11bn data centre, Project Rainier, in October, built exclusively to run workloads from Anthropic.

Walmart – US consumer giant Walmart hit $1 trillion in valuation, elevating it to ranks previously held by the technology giants. Its shares have more than doubled in the past two years and have risen over 15% for the year to date. Its investment in ecommerce appears to have paid off, with annual ecommerce sales expected to total about $140bn when it reports results this month.