FTSE 100 Shines While FTSE 250 Struggles: Will Defensive Plays Dominate This Week?

UK markets provided another clue that investor sentiment is likely to be skittish at best this week, with the main indices falling at the open. The latest Chinese developments did not help the early cause, with the miners dropping sharply, while Scottish Mortgage (LON:SMT) was also under pressure given its exposure to US tech. Some strength in the tobaccos, supermarkets, and pharmaceuticals implied a switch towards more defensive plays, and the premier index could yet become a haven destination depending on events elsewhere this week. In the meantime, the FTSE 100 is ahead by 3.6% so far in January, with the FTSE 250 having dipped 1.1% in contrast.

In the more domestically exposed index, WH Smith (LON:SMWH) was a bright spot after confirming that it was considering hiving off its High Street business, with the shares adding more than 6% at the open. The unit has been something of a drag on the group more recently, with store closures and faltering progress being in contrast to the Travel business which is currently responsible for 85% of trading profit. A decline of 17% for the share price over the last three months has resulted in a loss of 4% over the last year before today and comes ahead of a planned Christmas trading update on Wednesday this week.

Elsewhere

There appears to be a new kid on the tech block and the early signs are that the last week of January will provide the first sustained bout of volatility in the New Year.

Chinese AI company DeepSeek has released a new product that has a fraction of the development costs seen in the US and which could also provide some defence against any restrictions placed on China by the US as this particular battle intensifies. Japanese chip-related stocks dropped sharply overnight and although it is too early to say with total certainty, US futures are currently looking weak ahead of the opening bell today.

It is far too early to describe DeepSeek as an existential threat to US-based AI solutions. By the same token, it will almost certainly put the cat among the pigeons as investors scramble to assess the potential damage it could have on a burgeoning industry that has powered much of the gain seen in the main indices over the last couple of years. The emerging news over the weekend of an emerging threat to the US dominance seen thus far comes ahead of a week which sees four of the “Magnificent Seven” report earnings, namely Meta Platforms, Microsoft (NASDAQ:MSFT), Tesla and Apple (NASDAQ:AAPL). Quite apart from the results they provide, the larger question has suddenly become whether the hundreds of billions of dollar iin nvestment in AI needs re-evaluation.

The news follows a weaker close on Friday for the US market, with the benchmark S&P 500 giving up gains which saw it briefly break new highs. The new President’s pro-business rhetoric has been positive for the markets to date, while his promised severe actions on tariffs to have yet to materialise, at least for the moment. Despite the weakness and leading into the end of January, the Dow Jones has added 4.4% so far this year, with gains of 3.7% and 3.3% for the S&P 500 and Nasdaq respectively.

Quite apart from any AI considerations, investors will need to spin several plates this week. Corporate updates switch into top gear, with releases from the likes of Boeing (NYSE:BA), Starbucks (NASDAQ:SBUX), Intel (NASDAQ:INTC), IBM (NYSE:IBM), Chevron (NYSE:CVX) and Exxon Mobil (NYSE:XOM) after what has been a promising start to the season. The core Personal Consumption Expenditures report will also be released on Friday and, while the Federal Reserve’s preferred measure of inflation will give the latest view on rising prices, it will also come after the Fed has announced its latest interest decision, where the market has overwhelmingly priced in a no-change decision.

In contrast to the pressure seen on Japanese chip-related stocks overnight, there were some positive moves for those in China, such as Merit Interactive where shares rose by more than 20% given its ties to DeepSeek. The general upward pressure on indices came despite a reminder of the challenges still in place for the Chinese economy, where the manufacturing PMI fell into contractionary territory in December, with bulls of the region clinging to hopes that renewed government spending will mean that this was a temporary aberration.