A look at the day ahead in U.S. and global markets from Mike Dolan
The AI-related stock shakeout seems to have calmed as investors turn to megacap tech earnings – with the Federal Reserve set to pause its easing campaign in its first policy decision for 2025 just as central banks in Canada and Sweden cut again.
The hoopla over the arrival of China’s cheap artificial intelligence model DeepSeek continues to reverberate, even though giant U.S. chip firms like AI darling Nvidia have clawed back at least some of Monday’s steep losses.
Up again ahead of Wednesday’s bell Nvidia’s shares look set to have recovered just over half of the 17% plunge at the start of the week – a moved that lopped more than half a trillion dollars off its overall market value.
The whole episode has reintroduced two broader market fears – the concentration of broad index fortunes in a handful of outsize tech stocks, and whether the hundreds of billions of dollars of investment spending in AI development by many firms is really worth it longer term.
On the latter issue at least, quarterly updates from first three of the so-called ‘Magnificent Seven’ megacaps on Wednesday may tell a tale as Microsoft, Meta and Tesla report after the bell tonight.
With China’s markets closed for the lunar new year holiday, there was a scramble to find out more about DeepSeek.
U.S. officials said they’re looking at the national security implications of the Chinese wonder app, while President Donald Trump’s crypto czar said it was possible that intellectual property theft could have been at play. Both OpenAI and Microsoft say they are looking at the extent to which their tech had been copied.
Chinese tech behemoth Alibaba, meantime, released a new version of its Qwen 2.5 AI model – claiming it surpassed the highly-acclaimed DeepSeek-V3. Its U.S.-listed stock was 2% higher before Wednesday’s open.
Global investors, such as Norway’s $1.8 trillion wealth fund, said they were surprised about the DeepSeek development and fretted about tech concentration risk in portfolios.
But boss Nicolai Tangen said on Wednesday that the wealth fund had a small underweight in tech stocks before this and warned that last year’s big market returns – which bagged it a record $222 billion annual profit – may not be repeated. “I just want to warn again that this will not last forever.”
U.S. stock futures were marginally higher on Wednesday although European stocks powered ahead to new records, helped by an 11% surge in chip equipment maker ASML after strong earnings. The European technology sector at large surged 4.5% – its best single day in a year.
The gloomy European macro backdrop is being offset by hopes for further interest rate cuts this week, with the European Central Bank widely expected to lop another quarter point off its main policy rates on Thursday.
Sweden’s central bank got the ball rolling on Wednesday and cut its main rate by a quarter point to 2.25% – the Riksbank’s fifth rate cut in a row and the sixth since May last year. The crown brushed off the expected move.
The Bank of Canada is also expected to bang that drum later today with a quarter point rate cut of its own, comfortable with sub-target inflation rates and wary of the economic impact of repeated Trump tariff threats. The Canadian dollar was slightly weaker ahead of the decision.
The Fed, however, is set to stand pat today and this week’s meeting will be the first one without a rate cut since it began easing in September.
With inflation stuck above 2% and estimates of U.S. GDP growth back above 3% for the first time this year – according to the Atlanta Fed’s ‘GDPNow’ model – the Fed is expected to hold the line for a bit while it assesses the macro impact of Trump’s new policies.
Encouraging the rates market this week, however, has been signs of the equity market wobbling and news on Tuesday that U.S. consumer confidence began to ebb more than expected in January.
That’s led Fed futures to fully price in two more rate cuts by the end of this year.
Helped by a decent 7-year note auction, Treasury yields have slipped back again. Two-year yields are back below 4.2% and 10-year yields are probing 4.5%.
The dollar index bucked the yield trend and pushed higher – in part because the slipped back ahead of the expected ECB cut tomorrow.
Key developments that should provide more direction to U.S. markets later on Wednesday:
* U.S. Federal Reserve’s Federal Open Market Committee announces latest policy decision, press conference from Fed Chair Jerome Powell; Bank of Canada policy decision, briefing by governor Tiff Macklem
* US December trade balance, Dec wholesale/retail inventories
* US corporate earnings: Microsoft, Meta, Tesla, IBM, Ameriprise, General Dynamics, Corning, Nasdaq, MSCI, Otis, Danaher, Hess, ADP, Teradyne, Las Vegas Sands, ServiceNow, Western Digital, CH Robinson, Lam Research, Waste Management, United Rentals, Lennox, Norfolk Southern, Progressive
* Bank of England’s Governor Andrew Bailey gives evidence on the Financial Stability Report to a parliamentary committee
(By Mike Dolan, editing by Christina Fincher; mike.dolan@thomsonreuters.com)
