Daily Newsletter - February 25, 2025

1. Alibaba will invest $53 billion in AI and cloud computing over the next three years.

Chinese tech giant Alibaba said it will spend more than $50 billion on artificial intelligence and cloud computing over the next three years, a week after co-founder Jack Ma was seen meeting with President Xi Jinping.

China’s largest hyperscaler will spend more on capex in the next 3 years than in the last 10 combined. Even with this surge, China’s AI capex remains tiny compared to US peers, as shown in this chart.

2. Meanwhile, Trump is firing a big salvo towards financial and technological decoupling from China.

The monthlong rally in Chinese tech stocks hit a snag yesterday after US President Donald Trump’s memo on restricting US-China investments soured sentiment.

It’s a timely reminder that the challenges facing China goes beyond trade and the US is moving toward financial and technology decoupling as well.

The “America First Investment Policy” memo, which came out late Friday, seeks to limit Chinese strategic investments in US sectors, and scrutinizes America’s investment in China.

While it didn’t cause much damage to stocks in mainland and Hong Kong, Chinese ADRs sold off hard. The Nasdaq Golden Dragon China Index fell 5%, with Alibaba down about 10%.

To be sure, the selloff of Chinese ADRs wasn’t particularly out of sync with the losses in the US market.

The old-fashioned profit-taking may be at work after a rampant rally that led to Alibaba rising more than 50% this year. The MSCI China benchmark stalling at the resistant level provided investors a convenient excuse to take some chips off the table.

3. As Europe’s stock market hits records, investors are showing less conviction on the Euro.

While overall uncertainty remains high on the macro and geopolitical fronts, German election results provide at least some comfort. While both the left and the far-right gained in voters, they did not reach a level that markets would see as disruptive at this point.

Looking at markets from a multi-asset perspective, things are not rosy, however.

In contrast to the optimism seen on stocks, the headlines on Russia and Ukraine seem to have FX markets worried.

The euro — typically a confidence gauge for the region — has been weakening since october as the economy struggles to recover while tariff threats are acting as a headwind.

“A weaker-for-longer euro may be ultimately inconsistent with prolonged upside for EU equities, unless the German election revives hopes of a policy U-turn at the EU-wide level,” they say.

4. Soaring demand for reasoning models will consume electricity, microchips and data-center real estate for the foreseeable future.

Reasoning models, which are based on large language models, are different in that their actual operation consumes many times more resources, in terms of both microchips and electricity.

Owing to their enhanced capabilities, these reasoning systems will likely soon become the default way that people use AI for many tasks. As businesses are discovering that the new AI models are more capable, they’re calling on them more and more often.

This is shifting demand for computing capacity from training models toward using them—or what’s called “inference” in the AI industry.

To look at in the most simplistic way, if new, more efficient AI models based on the insights that went into DeepSeek slash demand for computing power for AI by a tenth, but reasoning models become the standard and increase demand for those models by a factor of 100, that’s still a 10-fold increase in future demand for power for AI.

“Over the course of the coming decade, the amount of demand for AI models could go up by a factor of a trillion or more, thanks to reasoning models and rapid adoption.”

Below: Power supply is growing much slower than power demand from AI.

5. America’s biggest employer, the federal government, is laying off workers in droves.

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