Last week wrapped up with a striking contrast: bullish momentum through most of the week gave way to a bearish close on Friday. Donald Trump’s smooth inauguration and a bold $500bn AI infrastructure pledge fueled market optimism, further amplified by Netflix’s stellar quarterly results. However, the narrative shifted dramatically as Friday’s PMI data exceeded expectations across the US and Europe. The stronger-than-anticipated economic indicators tempered hopes for Federal Reserve (Fed) rate cuts, which had been bolstered by Trump’s earlier calls for lower interest rates. A set of stronger-than-expected PMI data prompted investors to recalibrate their Fed outlook, weighing stronger economic growth against the likelihood of a more hawkish Federal Reserve response.
A such, the Stoxx 600 retreated after hitting a fresh record. The S&P500 and Nasdaq traded lower as well, and futures, especially Nasdaq futures, are looking pretty bad this morning with a more than 2% slide at the time of writing hammered by the news that the Chinese startup DeepSeek could run its latest AI model on less advanced chips… and could disrupt the US tech’s global dominance.
But keep calm and breath. It’s probably too early to bet that DeepSeek will challenge the global AI leaders and disrupt the US tech’s dominance. This week’s Big Tech earnings will certainly give a stronger conviction to those looking for a fresh direction.
Earnings
Four of the Magnificent 7 stocks – Microsoft, Meta, Tesla and Apple – and ASML are due to announce their Q4 earnings this week but there is more reluctance than hope as the profit growth of these companies – that are confronted to very tough comparison – is expected to show the slowest pace in two years. In numbers, the Mag7 stocks eked out a 76% return in 2023 – the first year of the AI craze – but are expected to print an earnings increase of 34% in 2024, that is expected to slow down to 18% this year according to Bloomberg. And if you pull Nvidia out of this, the remaining magnificent companies are expected to print just 3% increase in their profits this year. That’s not very exciting at the current valuations. There are two options for the valuations to normalize: either the earnings will go up or prices will come down. Many investors, this year, bet for the second option and expect that the tech rally will show cracks and gove way to a rotation from Big Tech toward the more cyclical sectors of the US, and beyond the US. So far, 16% of the S&P500 reported their Q4 earnings and 80% delivered a positive EPS surprise. Besides the four of the Mag7 companies, other big names like Intel, Visa and Mastercard, and the oil giants will be going to the earnings confessional. It will be a big week of earnings.
Big week for central banks
It will be a big week for central bank decisions, as well. The Fed is expected to announce its latest rate decision this Wednesday, and is set for an almost certain no action as the Fed members will certainly want to consider the risks to inflation posed by Donald Trump’s various growth-boosting and trade-restricting policies. The US yields are softer this morning on news that Trump will not impose 25% tariffs on Colombia as he said he would a few hours before, but the dollar index kicks off the week with a rebound above the 50-DMA. Despite Trump’s willingness to push the Fed for unnecessary rate cuts to boost economy, the US economy doesn’t necessarily need a boost. The jobs number keep coming unexpectedly strong and growth remains robust thanks to solid consumer spending. The Q4 growth update for the US economy will be released on Thursday this week, and may show that the US economy grew 2.7% last quarter – slightly lower than 3.1% printed at the last update – but the price pressures may have increased from 1.9% to 2.5%. And the rising price pressures – while growth nears 3% – is certainly not favourable for further rate cuts.
Across the Atlantic Ocean, however, the Q4 growth due to be released a few hours before the US growth data, is expected to print a meagre 0.1% growth in Q4 in comparison to the US’ 2.7%, giving the European Central Bank (ECB) enough reason to cut the rates on the old continent as long as inflationary pressures remain under control. As such, the EURUSD that saw a decent rally above the 1.05 mark on Friday, looks softer this morning. Levels above the 1.05 are interesting top selling opportunities for investors that continue to bet that the growth gap between the US and the eurozone and the diverging Fed and ECB outlooks hint at a sustained euro weakness, rather than a sustainable recovery of the single currency. The ECB is expected to a 25bp cut when it meets on Thursday.
Note that the European economies are not flourishing to boost inflation but the recent rise in energy prices need dome close monitoring. Crude prices rallied up to 20% between mid-December to mid-January, while the European nat gas prices jumped more than 25% over the same period and are nearly 120% up since February 2024 dip. While crude oil extends retreat this morning – also hammered by another set of soft PMI figures from China – the pressure in European nat gas prices will likely continue on the back of cold winter weather in Europe and falling nat gas reserves. Italy, for example, which has the EU’s second biggest storage sites after Germany, is worried about the falling underground storages – that are just around 58% full right now compared to 74% last year – and is willing to replenish them as early as next month instead of waiting until April. The news is mostly priced in, but the price retreats attract dip buyers and the risks remain tilted to the upside – a thing that could shift the ECB outlook toward a more cautious tone, slow the urge to sell the euro but not yet reverse the bearish trend against the US dollar.
Elsewhere, the Bank of Canada (BoC) is expected to lower its rate by 25bp this week, China will be closed most of the week due to the Lunar New Year break and inflation in Tokyo due Friday is expected to show further rise to 2.5%. The Bank of Japan’s (BoJ) decision to hike rates and revise the inflation forecast higher didn’t trigger a major reaction in the USDJPY – as the move was broadly priced in. The USDJPY tested but couldn’t clear the 50-DMA and the week starts looking supportive of further gains in the USDJPY.
