European stocks at record high, US jobs in focus

Monday’s trade tensions have been gradually waning, last week’s DeepSeek shocker is also digested among global tech investors. Earnings continue to flow in, on the other hand, and reinforce the narrative – or the fear – of rising AI spending and slowing growth. In this context, Amazon – that reported its latest quarter results yesterday after the bell – was the latest to post better-than-expected earnings and revenue but a slower growth of its cloud division. The company warned that the current quarter profit will miss expectations due to rising AI spending. Investors sent Amazon shares 4% lower in the afterhours trading despite a 75% increase in the EPS since last year. As a result, Amazon won’t print a post-earnings record high when the US markets open today, but the rally in Amazon’s share price has been accelerating lately, and the company is still a bright spot for AI investors, given that the AI and robotics could lead to important productivity gains and cost savings across their business units and give a sustainable boost to their future profits.

Overall, 6 of the Magnificent 7 companies have reported earnings so far, and they collectively reported a revenue growth of approximately 10% year-over-year for the fourth quarter of 2024. The combined net income for these six companies increased by about 15% compared to the same period last year. They gave cautious outlook for the coming quarters but said that they will increase spending on AI to make sure to lead the dance. Among the 6, Meta has been the brightest spot as the company is about to launch its own AI and Zuckerberg wants 1bn users globally to join in. While Tesla has been the least convincing, provided that the rising global dislike for Elon Musk starts taking a toll on company’s sales.

Zooming out, the S&P 500 and Nasdaq 100 are surviving the less-than-wow Big Tech earnings. Both indices hang on near their ATH levels. The easing US yields certainly give a hand to valuations despite uncertainties regarding what the Federal Reserve (Fed) should do next. This week’s US jobs data has so far given mixed signals with lower job openings in December, lower job cuts during the course of last year but a jump in terminations in January, weaker labour productivity, a weaker-than-expected jump in labour costs, and a stronger-than-expected ADP employment figures. Today, the official US jobs data is expected to print 169’000 new nonfarm jobs added last month, with a slightly slower wages growth and a stable unemployment rate near the 4.1%. But investors will also focus on the annual revisions to the jobs figures. Note that, the early estimates in August hinted that the US jobs numbers could see a downward revision of more than 800’000 jobs. Economists expect that the downward revision will rather be around 600-700’000 jobs. If that’s the case, the week will end with the narrative that the US jobs market is healthily slowing – a scenario that would allow the Fed to continue cutting the rates but not hurriedly, and keep the market sentiment at a sweet spot. A weaker-than-expected NFP figure, and/or rising wages would weigh on sentiment, while a stronger-than-expected NFP – if combined to softening wages would reinforce the goldilocks scenario. The US dollar – which has been supported by safe haven flows due to Trump trade worries – has reversed course since Monday’s jump. A set of data in line with expectations should lead to a further pullback of the US dollar against most majors. Yet the dollar’s depreciation is expected to remain limited against European currencies given the relatively more dovish outlook from the European central banks.

And indeed, the Bank of England (BoE) announced a 25bp cut yesterday, and two members wanted to cut by 50bp! When asked for Rachel Reeves’ growth plans, the BoE members said that ‘this is the right thing to do’. BUT the BoE lowered its growth forecasts while lifting its inflation forecast. That’s exactly the opposite of what you would call a successful outcome for Rachel Reeves’ policies. As a result, the pound came under a renewed selling pressure against the greenback and weakened against the euro, the FTSE 100 advanced to a fresh ATH as miners that are less exposed to the domestic growth concerns led the rally. Across the Channel, the Stoxx 600 hit a fresh ATH level reflecting strong earnings in healthcare and prospects of supportive European Central Bank (ECB) policy.

In energy, US crude extended losses toward the $70pb. There is strong dip buying near this level this morning but the Trump trade policies hammer global growth prospects and will probably support a deeper retreat in crude prices. A further fall toward the $65/68pb range now looks plausible. It’s good news for global inflation. Yet in Europe, the European nat gas prices keep climbing on the back of rapidly falling European nat gas stockpiles. The idea that the big storage sites are tempted to replenish their reserves at high prices instead of waiting for the prices to fall supports the positive trend, and raises questions among the ECB doves on whether the ECB could keep inflation under control when energy price outlook looks... somehow unideal.