Massive week ahead, as tech earnings and Fed rate decisions dominate

• Deepwater AI announcement sparks US tech-led selloff.

• Chinese manufacturing PMI falls back into contraction.

• Massive week ahead, as tech earnings and Fed rate decisions dominate.

US markets are likely to take centre stage today as a slump in the tech sector puts pressure on wider markets. This comes off the back of an announcement from Chinese Tech firm Deepwater, which posted incredibly impressive results from there budget AI model which costs a fraction of the price compared with the likes of OpenAI. The prospect of a high-performance low-cost product provide significant question marks over the necessity of spending hundreds of billions on Nvidia chips and development going forward. For markets, this is a timely reminder that the AI era will likely be unpredictable, just like the development of the internet. While many will be left questioning Nvidia’s $3.5 trillion market cap, the potential for businesses to obtain the benefits of AI at a fraction of the cost could be good news for the wider market. However, this is a reminder that the huge investment undertaken by big tech over recent years may not have built them the kind of impenetrable moat against Chinese competition many had presumed.

The latest Chinese PMI survey brought little optimism for the economic recovery, with the manufacturing reading falling back into contraction (49.1) after postings its steepest decline in five-months. While there is a hope that this is a temporary blip as businesses are impacted by the Lunar New Year festival, the weak foreign orders, employment, new orders, and prices highlight ongoing issues within the Chinese manufacturing sector. The weakness seen in the Yuan highlights concerns around the recovery story, reversing much of the gains seen in the wake of Trump’s comments that he would rather not place tariffs on Chinese imports. Nonetheless, the sudden 25% tariff placed on Colombian imports into the US over the weekend serves to highlight just how swiftly trade relations can deteriorate under Trump.

Looking ahead, this week represents the busiest period of the fourth quarter earnings season out of the US coupled with a period that will see a raft of central bank in interest rate decisions from the likes of the FOMC, ECB, and bank of Canada. With the deepwater story hitting the US tech sector hard in early trade today, the impending updates from the likes of Meta, Apple, Tesla, and Microsoft provide a timely opportunity to highlight the size and scope of AI spending in its current format. Meanwhile this week’s FOMC meeting provides an unwelcome reminder for markets over the pace of easing this year, with the bank likely to pair a rate pause with a data dependent approach that will seek to temper expectations for the coming months.