Stuck between a rock and Trump

I was clearly not alone thinking that Monday’s AI selloff triggered by DeepSeek news was overdone. Investors rushed back to the market to buy Nvidia shares at a discount – there was strong dip buying below the $120 per share, and the stock price closed the session 9% up. The afterhours was calm. The Magnificent 7 stocks rebounded 3%, Nasdaq jumped 1.60%, Apple – which was among rare tech stocks that was cheering the cheaper AI news – rallied more than 3% on Monday and on Tuesday, while the Global X Uranium ETF recovered 1.77%.

The DeepSeek shock is probably behind without further damage until investors and the Big Tech leaders get more clarity on if and how DeepSeek managed to create a model *this* cheap. But no matter if DeepSeek’s claims are true or not, Monday’s tech rout will taint the earnings season, and investors will be peakier about the AI spending announcements. Together, Amazon, Meta, Alphabet and Microsoft are expected to spend up to $300bn in AI this year, while the earnings growth is expected to slow to less than 20% in 2025.

Zooming into the Q4, the Magnificent 7 are expected to print a 20% earnings growth last quarter. That’s down from nearly 60% printed the same time last year. And the combination of robust spending and slowing earnings doesn’t bode well with investors. The narrative this earnings season is shifting from how much the big Tech should spend to get to the place they want to be to how little they could spend to get there.

This being said, I still strongly believe that compromising quality for lower cost is not the best way to remain a leader in such a fast evolving tech environment, but investors will say the last word. 

Speaking of earnings, ASML—another victim of the DeepSeek-triggered tech rally this week—couldn’t rebound as successfully as its US peers on Tuesday. But the company just printed a set of better-than-expected Q4 results before the bell in Europe, which should help shrug off some of the DeepSeek dust.

Today, after the bell, Tesla, Meta and Microsoft will reveal their own Q4 results. Hopefully, they will come with encouraging news regarding the return on their AI investment to help soothing investors’ nerves about further, massive AI spending announcements... Strong results could help improving appetite after a difficult start to the week, while any misstep will likely be hardly punished. Expect volatility.

Rate decisions

US yields remained under pressure yesterday as capital continued to flow into the safer US treasuries as many investors preferred to stay on the safe side of the game. The US dollar, however, gained on the back of Donald Trump’s renewed tariff threats. The Tariff Man reacted to Treasury Secretary Bessent’s proposal of imposing a 2.5% universal tariff by saying that the tariffs should be ‘much bigger than that’.

But of course, the higher the tariffs, the higher the price pressures will be. And it’s up to Federal Reserve to deal with the consequences. So yes, the Fed members have been scratching their heads since yesterday and will announce their latest policy verdict later today. The Fed is broadly and highly expected to maintain rates unchanged at today’s announcement. The US job market remains healthy, US growth robust, earnings encouraging, consumer spending strong and inflation is giving signs of heating up. US headline inflation hit the 2.9% in the latest reading, up from 2.4% printed earlier in fall, while core inflation has slightly come down but proves to be very sticky above the 3% mark. But, the latest consumer survey showed that Americans are losing confidence in the economy, they say that the jobs are harder to get, that the income is expected to improve less and that business conditions don’t look as encouraging as they did a few months ago. Therefore, the Fed is stuck between a rock and Donald Trump. What Powell will say matters more than what the Fed announces today. Before the Fed announcement, investors bet that the Fed won’t announce the next rate cut before May. A dovish tone from the Fed should further ease the US yields, while a cautious tone could revive the bond sell off. The US dollar could give back a part of Trump-led gains with a supportive Fed statement, but the fundamentals compared to the other major economies will likely remain supportive of the US dollar. And the Trump tariff risks remain tilted to the upside.

Speaking of other countries, the Bank of Canada (BoC) is expected to announce a 25bp cut to its policy rate today and the European Central Bank (ECB) will likely do the same when it meets tomorrow. The USDCAD is consolidating a few pips below the 1.44 mark this morning. While the divergence between the BoC and the Fed is already priced in, any dovish comments from the BoC could revive the selling pressure in the Loonie and support a further advance in USDCAD toward the 1.45 mark. In Europe, the euro appetite is losing strength after the failure to pursue gains above the 1.05 psychological mark. Technically, there is an evening star formation that hints that the weakness could extend into the next few sessions. The eurozone’s growth outlook is less than ideal and the ECB has solid reason to sound supportive and act.