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Marketmind: Megacaps stumble at high bar as Fed decision awaited

[January 31, 2024] A look at the day ahead in U.S. and global markets from Mike Dolan

It's a measure of the high bar of expectations now set for the expensive megacap U.S. stocks that even relatively positive earnings reports have seen some recoil in their lofty share prices.

With the Federal Reserve's latest policy decision looming large later on Wednesday, yet another gloomy signal from China's ailing economy and the Big Tech earnings season grabbed investor lapels ahead of the bell as the so-called Magnificent 7 report fourth quarter profits.

Microsoft managed to beat market estimates for profit and revenue as new artificial-intelligence features helped attract customers to its Azure cloud service and it built out its own AI services. But Microsoft shares ebbed 1% after-hours as investors preferred to focus on rising costs.

Alphabet's update was perhaps less ambiguous and its stock swooned 6% overnight as holiday-season advertising sales disappointed and the digital giant flagged AI-related investment costs too.

In a similar story for tech stocks around the world, Samsung shares fell 2% despite the company forecasting continued recovery in memory chips and tech demand this year, an AI-inspired boon and lower fourth-quarter loss than expected.

Adding to the bout of "Mag7" anxiety, shares of Tesla dropped another 3% overnight after a Delaware judge tossed out Elon Musk's record-breaking $56 billion Tesla pay package - calling the compensation "an unfathomable sum" that was unfair to shareholders.

The upshot of the cold shower for megacaps at large saw S&P500 futures retreating from record highs and down 0.5% before Wednesday's open, with Nasdaq futures down more than 1%.

Overseas stocks were steadier, but China's long-suffering stocks continued to outperform with losses of about 1% as the latest manufacturing surveys showed activity contracting in January for the fourth straight month.

With the long-smoldering domestic property bust depressing household consumption and business investment, the authorities are struggling to draw a line under the crisis and both consumer price and domestic asset price deflation has ensued.

The most indebted real estate giant China Evergrande was placed in liquidation this week and credit rating agency S&P Global Ratings said offshore dollar bondholders stand to receive a potentially tiny payout in a complicated process that could take years to play out.

Dire weather around the upcoming Lunar new year holiday doesn't help. Heavy fog suspended ships travelling through the Qiongzhou Strait off the coast of China's Guangdong province, while snow and freezing rain across many parts of the country is expected to strain travel for millions over the next few days.

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The Charging Bull or Wall Street Bull is pictured in the Manhattan borough of New York City, New York, U.S., January 16, 2019. REUTERS/Carlo Allegri/File Photo

And as China stocks fall anew, official action to stabilize yuan was stepped up - something many investors merely ends up forcing a choice over currency depreciation or further internal asset price deflation.

As has been the case all year, rising Japanese stocks are a stark regional contrast and the Nikkei index rose 0.6% on Wednesday, notched its best January in 26 years after shaking off early chip-led declines.

Back on Wall St, the Fed decision and latest private sector jobs update will dominate today alongside the earnings season.

The Fed isn't expected to change rates today but any signals on how soon its well-flagged interest rate cuts this year will start will be lapped up.

Underlined by a 0.6% International Monetary Fund forecast upgrade for U.S. growth this year to 2.1%, the U.S. economy continues to impress even as inflation subsides.

On Tuesday, news of an unexpected rise in U.S. job openings and fresh boost to consumer confidence continue to underline the rude health of the U.S. labor market and household demand.

With one eye on the details of the U.S. Treasury's quarterly refunding schedule and auction sizes due out later, 10-year Treasury yields slipped back below 4% for the first time in two weeks. Crude oil prices also fell back and the dollar was firmer.

Key diary items that may provide direction to U.S. markets later on Wednesday:

* U.S. Federal Reserve's Federal Open Market Committee policy decision, press conference by Chair Jerome Powell

* U.S. corporate earnings: Boeing, MetLife, Qualcomm, Mastercard, ADP, Align Technology, Old Dominion Freight, Boston Scientific, Hess, Thermo Fisher

* U.S. Jan ADP private sector jobs report, Jan Chicago business survey, U.S. Q4 employment costs and wages

* NATO Secretary General Jens Stoltenberg speaks in Washington

* U.S. Treasury auctions 4-week bills

(By Mike Dolan, Editing by Bernadette Baum)

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