Morning Wrap: ASX 200 futures flat, S&P 500 extends gains + Why Liontown shorters are winning

The S&P 500 closes higher for a fourth day, US producer prices unexpectedly jump amid higher energy prices, oil gives back most of its recent gains, the Birkenstock debut flops after it opens 11% below its IPO price, Medtech stocks tumble as obesity drugs experience more trial success, Gina Rinehart is in position to block Albemarle's bid for Liontown and what do bond markets tell us about a hard landing?

Let's dive in.

S&P 500 SESSION CHART

S&P 500 higher, recovers from intraday lows to finish near best levels (Source: TradingView)

MARKETS

• S&P 500 higher, recovers from session low of -0.30% to close near best levels

• S&P 500 extends its winning streak to four, up 2.8% since last Thursday

• Energy was a major underperformer as oil prices sold off to near pre-Israel-Hamas levels. Headlines suggest Iran may not have been surprised by the weekend attack

• Gold finished up 0.8%, now up 3% in the last four sessions to a two-week high

• US 10-year down 10 bps to 4.56%, a near two-week low

• Global hedge funds oppose China's new rules for the sector (Bloomberg)

• Steepening yield curve suggests investors are less concerned about a recession (Bloomberg)

STOCKS

• Birkenstock opens 11% below $46 IPO price in trading debut (Reuters)

• Exxon Mobil to buy Pioneer Natural Resources Co for US$58bn (Bloomberg)

• Samsung's profit decline slows as chip market bottoms (Bloomberg)

• Novo Nordisk rallies after Ozempic's kidney disease treatment trial showed signs of success (Reuters)

• Stellantis and Samsung to build US$3.2bn EV battery factory in Indiana (CNBC)

CENTRAL BANKS

• San Francisco Fed President Daly says neutral rate could be higher than pre-pandemic levels (Bloomberg)

• Fed's Bowman warns higher rates may be needed to control inflation (Bloomberg)

• ECB's Knot says inflation still too high but starting to ease (Reuters)

• ECB survey shows shows consumer inflation expectations increased slightly (Reuters)

• BOJ considers raising inflation forecasts again (Kyodo)

• RBA Kent says rate hikes still working their way through economy (Bloomberg)

GEOPOLITICS

• Israel continues to hit Hamas targets in Gaza, readies for ground invasion (FT)

• Biden vows more ammunition and assistance to Israel (Politico)

ECONOMY

• US producer prices rise more than expected in September amid higher costs for energy products and food (Reuters)

• Threat of wider Middle East conflict could complicate global efforts to contain inflation (NY Times)

US PPI Surprise

The US producer price index unexpectedly rose to 2.2% in September after rising 2.0% in August and well above expectations of 1.6%.

Core PPI rose to 2.8% after climbing 2.9% in August but above expectations of 2.3%.

• Wholesale goods rose 0.9% from a month earlier

• Gasoline prices rose 5.4%

• Good prices rebounded 0.9%

• Services rose 0.3%

• This marks a third consecutive increase in PPI and the first jump in core PPI since April 2022

The battle against inflation is far from over but at least it mostly stems from the rise in oil prices. Nevertheless, PPI data was hot. So what will the Fed do?

Medtech Stocks Tumble

There's a lot of chatter in the US and Europe about gamechanging weight loss drugs, with development led by Novo Nordisk and Eli Lilly.

Overnight, Novo Nordisk said it would stop a trial studying Ozempic to treat kidney failure in diabetes patients ahead of schedule as interim analysis showed signs of success. Its shares rallied 6.3% while peers Eli Lilly also rallied 4.5%.

There's a lot of speculation about how these drugs will impact consumption as well as various other industries such as airlines, packaging and smoking. For example:

• Barclays says the drugs cut urges to consume addictive substances such as alcohol and cigarettes, which may hurt demand for products such as Pepsi and McDonalds

• Bloomberg reports that traders added US$815 million in short positions to restaurant stocks over the past 30 days, with concerns that higher rates and weight-loss drugs will impact consumer behaviour

• United Airlines says they would save US$80 million per annum if the average passenger weight falls by 10 pounds

• Medical device stocks have tumbled as a diabetes treatment will eventually cut back the need for medical devices that provide insulin

The overnight developments have also weighed on ResMed (ASX: RMD), with its ADRs down 4.1% overnight to a two-week low.

Why the Liontown Takeover is at Risk

The AFR reports that Gina Rinehart has boosted her stake in Liontown Resources (ASX: LTR) to 19.9% and notes that "Rinehart is highly unlikely to back the $3-a-share indicative offer from Albemarle given Hancock paid that price for most if its stock."

Liontown shares slumped 2.7% on Wednesday to a one-month low of $2.92.

What's interesting is that Liontown has experienced a massive spike in short interest from 4.0% in mid-September to now 9.3%. It's now the sixth most shorted stock on the ASX.

Liontown Resources short interest (Source: Shortman)

This makes sense from the perspective that the stock has been anchored around the $3.00 level thanks to the Albemarle bid. But what happens if that doesn't go through? Large cap lithium names like Pilbara Minerals (ASX: PLS) and Allkem (ASX: AKE) are all down around 20-30% since August.

Bonds Suggest A Recession Is Not the Base Case

My colleague Hans shares two interesting charts about why junk is outperforming treasuries and what the means for markets.

I'm sure you've heard this sentiment quite a lot in the last 18 months: "Bond markets have been pricing in a recession and equities are pricing in a soft landing". But that's an incredibly simplistic statement. The bond markets which have been pricing in a recession are specifically the government bond traders. And the further a recession is pushed out, the more that Treasury bond prices have fallen.

But this sentiment is not shared by all bond investors. As this chart shows, US junk bonds have actually been outperforming US Treasury bonds. That is, corporate bonds backed by companies with no profitability, little to no revenue, and low credit ratings, are actually doing better in price than the stuff which is meant to be safe-guarding your portfolio!

Source: Bloomberg

And after 500 basis points worth of interest rate rises, you would think there would be less firms with zero to negative profit margins. After all, chances are if you have no profits you are holding onto a lot of debt which must be serviced and paid off at much higher interest rates. But new data from Goldman Sachs suggests nearly half of all US-listed firms have negative profit margins.

Source: Goldman Sachs

These kinds of businesses did well with ample liquidity and near-zero interest rates. But how many Afterpay's are there in a lifetime? One, if that. How many biotech companies become a CSL? Very few, and there are certainly more Mesoblast's than CSL's. All of this is just something to think about when you audit your portfolio. As FinTwit's Michael Arouet put it, "this clean-up is long overdue and necessary for a fresh economic start."

ASX corporate actions occurring today:

• Trading ex-div: Future Generation Australia (FGX) – $0.03, Duxton Water (D20) – $0.03, WAM Global (WGB) – $0.05, Gowing Bros (GOW) – $0.03,

• Dividends paid: Ramelius Resources (RMS) – $0.02, Northern Star (NST) – $0.155, FFI Holdings (FFI) – $0.10, Pacific Current Group (PAC) – $0.23, Imdex (IMD) – $0.02, Brambles (BXB) – $0.21, Perseus Mining (PRU) – $0.02, IVE Group (IGL) – $0.085, South32 (S32) – $0.04, Pepper Money (PPM) – $0.03, Vulcan Steel (VSL) – $0.26 

• Listing: None 

Economic calendar (AEST):

• 4:00 pm: UK GDP

• 10:30 pm: US Inflation