Marketmind: Tech tonic, recession rethink

A look at the day ahead in U.S. and global markets from Mike Dolan.

Pumped-up hopes for U.S. tech sector earnings in a heavy week for corporate updates generally have twinned with the latest sign Europe may have dodged a winter recession.

With Microsoft topping the U.S. company reports on Tuesday and Tesla due later this week, Monday’s impressive Wall St rally was driven by a combination of chip sector ebullience and confidence the Federal Reserve will dial down the size of its interest rate hikes again next week.

Philadelphia SE semiconductor index jumped 5% on Monday as analysts upgraded the industry, making it the biggest one-day gain since November. The S&P500 jumped 1.2% and futures held nearly all those gains ahead of busy Tuesday.

With Microsoft in view, attention will be on the extent for cost cutting and job shedding in the tech and digital space. Music-streamer Spotify rose 2% on Monday as it joined a growing list of tech firms to announce staff cuts, shedding 6% of its workforce.

Reports of Ford’s plan to cut 3,200 workers in Europe shows job attrition may not be confined to tech sector.

But Microsoft stock gained too on Monday too after it announced another multibillion dollar investment in OpenAI, deepening ties with the startup behind the chatbot sensation ChatGPT.

Tesla jumped 7.7 % ahead of its earnings on Wednesday and as Chief Executive Elon Musk took the stand in a fraud trial related to tweets saying he had backed taking the electric automaker private.

After a year of conflict in Ukraine and military tensions surrounding Taiwan, 2022’s outperforming U.S. defence stocks will also grab the spotlight on Tuesday as Lockheed Martin and Raytheon report fourth quarter figures.

More broadly, the latest earnings season is still expected to show decline of about 3% over the previous year for S&P500 firms overall – even though beats are slightly ahead of forecast so far.

Even though net downgrades to U.S. 2023 earnings outlooks still dominate and the expected growth rate has halved again to just 2.4% since early November, the fact it’s still positive despite widespread recession fears is remarkable.

Whether that’s just too rosy and markets have yet to price a full-blown earnings recession is this year’s big question.

But hopes for the fabled ‘soft landing’ persist – with the Fed likely to downsize rate hikes to just 25 basis points, China’s economy reopening and a relatively warm winter and falling energy prices helping the euro zone skirt recession.

Euro zone business surveys for January showed the composite reading for both manufacturing and service sector activity back in expansion mode again for the first time since June.

Whether that’s good news for markets or a signal that the European Central Bank will have to stamp even harder to get double digit inflation back to target is a moot point.

Equivalent U.S. business soundings for this month are due out later.

With China’s markets closed for the new year holiday, Japan’s shares outperformed as long-term borrowing rates fell back further there. Europe’s stocks were little changed.

The euro was a little lower, but the dollar was broadly unchanged overall and U.S. Treasury yields were a touch easier.

Key developments that may provide direction to U.S. markets later on Tuesday:

* January business surveys for the United States and from around the world. U.S. Jan Richmond Fed manufacturing index, Philadelphia Fed’s non-manufacturing business survey.

* European Central Bank President Christine Lagarde, Dutch central bank chief Klaus Knot both speak. Bank of England Executive Director for Financial Stability Strategy and Risk Sarah Breeden speaks

* U.S. corp earnings: Microsoft, Texas Instruments, Verizon, Raytheon, Lockheed Martin, General Electric, Halliburton, Union Pacific, Johnson & Johnson, Danaher, 3M, Capital One, Invesco, Travelers, DR Horton, Paccar, F5, Intuitive Surgical.

(By Mike Dolan, editing by Ed Osmond mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)